Net new ARR says how much a company grew; the quick ratio says whether the growth came from a sound base or from a sales engine refilling a leaking one.
The SaaS quick ratio is ARR gained divided by ARR lost in the same period: (new + expansion) ÷ (contraction + churn). An illustrative company that adds 5.5 million of ARR in a quarter and loses 2.0 million has a quick ratio of 2.75. A second company with exactly the same 3.5 million of net new ARR, but 8.5 million gained and 5.0 million lost, scores 1.70, and a 50 per cent fall in new bookings would leave it with no growth at all.
Worked in full in The Growth Equity Investor by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Net new ARR is the number in the board pack headline. The quick ratio asks how it was produced: by a sales engine filling a tank that barely leaks, or by a sales engine running flat out to keep up with a tank that leaks badly. For a growth investor the second business is worth less on the same growth rate, because its growth depends on spend that can stop and its losses compound.
| Movement | Company A | Company B |
|---|---|---|
| New customer ARR | 4.0 | 7.0 |
| Expansion | 1.5 | 1.5 |
| Contraction | -0.5 | -1.5 |
| Churn | -1.5 | -3.5 |
| Net new ARR | 3.5 | 3.5 |
| Ending ARR | 53.5 | 53.5 |
Quick ratio = (new ARR + expansion ARR) ÷ (contracted ARR + churned ARR)
Company A: (4.0 + 1.5) ÷ (0.5 + 1.5) = 5.5 ÷ 2.0 = 2.75. Company B: (7.0 + 1.5) ÷ (1.5 + 3.5) = 8.5 ÷ 5.0 = 1.70. In Excel, with the four movements in B2:B5 entered as positive numbers: =(B2+B3)/(B4+B5). Use quarterly or trailing twelve-month movements; monthly figures are too noisy for a company of this size.
A quick ratio of 1.0 means the company is standing still: everything sold is lost again. The ratio does not care about the size of the business, only the balance of inflow and outflow, which is why it is useful alongside net new ARR rather than instead of it.
| Measure | Company A | Company B |
|---|---|---|
| Quick ratio | 2.75 | 1.70 |
| ARR lost in the quarter, % of opening | 4.0% | 10.0% |
| Gross revenue retention, quarter | 96.0% | 90.0% |
| Net revenue retention, quarter | 99.0% | 93.0% |
| Gross retention, compounded over four quarters | 84.9% | 65.6% |
| Net retention, compounded over four quarters | 96.1% | 74.8% |
| New bookings that would give a quick ratio of 1.0 | 0.5 | 3.5 |
Company B loses 10.0 per cent of its opening ARR every quarter. Compounded, its customers retain only 65.6 per cent of their revenue over a year, against 84.9 per cent at Company A. B's 3.5 million of growth needs 7.0 million of new bookings, 82 per cent of everything it gains, and so every dollar of growth costs it far more in sales and marketing. A's new bookings could fall 88 per cent before it stopped growing; B's could fall only 50 per cent. Hold the movements constant for four quarters, with losses and expansion applied to the growing base, and A ends at 63.79 million while B ends at 62.60: the gap opens even while net new ARR is identical at the start.
| Change in new bookings | A quick ratio | A net new ARR | B quick ratio | B net new ARR |
|---|---|---|---|---|
| -50% | 1.75 | 1.50 | 1.00 | 0.00 |
| -30% | 2.15 | 2.30 | 1.28 | 1.40 |
| 0% | 2.75 | 3.50 | 1.70 | 3.50 |
| +20% | 3.15 | 4.30 | 1.98 | 4.90 |
A 30 per cent fall in new bookings, an ordinary outcome when a market tightens or a sales leader leaves, cuts A's growth to 2.30 million and B's to 1.40. B's upside is larger too, because its sales engine is bigger, which is exactly why it can look attractive in a good quarter. The quick ratio tells you which of the two is a growth bet and which is a sales spend bet.
A benchmark of 4 is often quoted for early-stage SaaS. Treat it as a convention, not a market statistic, and note that it gets harder to reach as the base grows and churn scales with it. To score 4 on its current gross additions, Company A would have to cut its quarterly losses from 2.0 to 1.375 million. For a mature company, the retention rates behind the ratio are the better comparison.
The mistake is to compute the ratio on a mix of definitions: bookings rather than live ARR in the numerator, logo churn rather than revenue churn in the denominator, or reactivations of lapsed customers counted as new. Each flatters the ratio. The second mistake is to read the quick ratio without the retention rates: two companies at 2.0 can have very different churn if one has much higher new bookings. Build the four movements from the same customer-level ARR file that gives you net revenue retention, and convert any monthly churn to quarterly or annual figures by compounding, as in how to convert monthly churn to annual churn.
Report net new ARR with its four components and the quick ratio beside it. The ratio is a one-number check on whether growth comes from a durable base or from spend that must keep rising, and the bookings sensitivity shows how much of the growth would survive a weaker sales year. The entry-price arithmetic that turns these metrics into a return is in the free workbook for this case.
A benchmark of 4 is often quoted for early-stage companies, but it is a convention rather than market data and becomes harder to reach as the base grows. What matters is the margin of safety: the illustrative company at 2.75 could lose 88 per cent of its new bookings before growth stopped, while one at 1.70 could lose only 50 per cent.
Any period works as long as all four movements cover the same one, but monthly figures are noisy for most companies. Quarterly or trailing twelve-month movements are more stable. In the illustrative case the quarter's 5.5 million gained against 2.0 million lost gives 2.75; four identical quarters would give the same ratio on annual totals.
They use the same movements. Net revenue retention looks only at the existing base (expansion less contraction and churn), while the quick ratio adds new customers to the numerator. A company with 99.0 per cent quarterly NRR and a 2.75 quick ratio is growing mainly through new logos on a stable base; one with 93.0 per cent NRR and 1.70 is refilling a leak.
This article is one calculation from The Growth Equity Investor. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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