Liquidity
Quick Ratio
Apr 16, 2023
Quick Ratio
What is Quick Ratio
The quick ratio, also called the acid-test ratio, is a financial ratio used to measure a company’s ability to pay its short-term obligations. It is calculated by dividing the sum of a company’s cash, marketable securities, and receivables by its current liabilities. The quick ratio is a more conservative measure of liquidity than the current ratio, which uses all current assets in the calculation.
Why Quick Ratio is Important
The quick ratio is an important measure of a company’s financial health and its ability to pay off short-term debts. A low quick ratio may indicate that the company has too much debt and not enough liquidity, making it vulnerable to default in the event of an economic downturn. A high quick ratio, on the other hand, indicates that the company has sufficient liquidity to pay off its short-term obligations.
How Quick Ratio is Calculated
The quick ratio is calculated as follows:
Quick Ratio = (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities
For example, if a company has $1,000 in cash, $2,000 in marketable securities, $4,000 in accounts receivable, and $5,000 in current liabilities, its quick ratio would be calculated as follows:
Quick Ratio = ($1,000 + $2,000 + $4,000) / $5,000
Quick Ratio = $7,000 / $5,000
Quick Ratio = 1.4
How to Improve Quick Ratio
In order to improve its quick ratio, a company should consider reducing its current liabilities by paying down debt or negotiating better payment terms with its suppliers. The company should also consider increasing its cash and marketable securities by collecting its accounts receivable more quickly and reinvesting its profits.
Why Investors Value High Quick Ratio
Investors value high quick ratios as they indicate that a company is in good financial health and has sufficient liquidity to pay off its short-term obligations. A high quick ratio also suggests that the company is well-managed and has sufficient cash reserves to handle unexpected expenses or to take advantage of new opportunities.
How Quick Ratio Relates with Other Financial Metrics
The quick ratio is closely related to other financial metrics such as the current ratio, the debt-to-equity ratio, and the return on equity. A high quick ratio indicates that the company is in good financial health, which will be reflected in its other financial metrics.
Sources
Investopedia. “Quick Ratio.” Investopedia, Investopedia, 8 June 2020, www.investopedia.com/terms/q/quickratio.asp.
Fool.com. “What Is Quick Ratio?” The Motley Fool, 5 Apr. 2020, www.fool.com/investing/quick-ratio/.
“Quick Ratio Definition.” InvestingAnswers, www.investinganswers.com/financial-dictionary/financial-statement-analysis/quick-ratio-6151.
Quick Ratio
What is Quick Ratio
The quick ratio, also called the acid-test ratio, is a financial ratio used to measure a company’s ability to pay its short-term obligations. It is calculated by dividing the sum of a company’s cash, marketable securities, and receivables by its current liabilities. The quick ratio is a more conservative measure of liquidity than the current ratio, which uses all current assets in the calculation.
Why Quick Ratio is Important
The quick ratio is an important measure of a company’s financial health and its ability to pay off short-term debts. A low quick ratio may indicate that the company has too much debt and not enough liquidity, making it vulnerable to default in the event of an economic downturn. A high quick ratio, on the other hand, indicates that the company has sufficient liquidity to pay off its short-term obligations.
How Quick Ratio is Calculated
The quick ratio is calculated as follows:
Quick Ratio = (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities
For example, if a company has $1,000 in cash, $2,000 in marketable securities, $4,000 in accounts receivable, and $5,000 in current liabilities, its quick ratio would be calculated as follows:
Quick Ratio = ($1,000 + $2,000 + $4,000) / $5,000
Quick Ratio = $7,000 / $5,000
Quick Ratio = 1.4
How to Improve Quick Ratio
In order to improve its quick ratio, a company should consider reducing its current liabilities by paying down debt or negotiating better payment terms with its suppliers. The company should also consider increasing its cash and marketable securities by collecting its accounts receivable more quickly and reinvesting its profits.
Why Investors Value High Quick Ratio
Investors value high quick ratios as they indicate that a company is in good financial health and has sufficient liquidity to pay off its short-term obligations. A high quick ratio also suggests that the company is well-managed and has sufficient cash reserves to handle unexpected expenses or to take advantage of new opportunities.
How Quick Ratio Relates with Other Financial Metrics
The quick ratio is closely related to other financial metrics such as the current ratio, the debt-to-equity ratio, and the return on equity. A high quick ratio indicates that the company is in good financial health, which will be reflected in its other financial metrics.
Sources
Investopedia. “Quick Ratio.” Investopedia, Investopedia, 8 June 2020, www.investopedia.com/terms/q/quickratio.asp.
Fool.com. “What Is Quick Ratio?” The Motley Fool, 5 Apr. 2020, www.fool.com/investing/quick-ratio/.
“Quick Ratio Definition.” InvestingAnswers, www.investinganswers.com/financial-dictionary/financial-statement-analysis/quick-ratio-6151.