Quick Ratio Definition & Example | InvestingAnswers
The quick ratio is a more conservative version of another well-known liquidity metric -- the current ratio. Although the two are similar, the quick ratio provides a. In finance, the quick ratio, also known as the acid-test ratio is a type of liquidity ratio which measures the ability of a company to use its near cash or quick assets to extinguish or retire its current liabilities immediately. Quick assets include those current assets that presumably can be quickly. As an investor, if you want a quick Current ratio means company's ability to pay off.
Cash, cash equivalents, short-term investments or marketable securities, and current accounts receivable are considered quick assets.
Short-term investments or marketable securities include trading securities and available for sale securities that can easily be converted into cash within the next 90 days. Marketable securities are traded on an open market with a known price and readily available buyers. Any stock on the New York Stock Exchange would be considered a marketable security because they can easily be sold to any investor when the market is open.
The quick ratio is often called the acid test ratio in reference to the historical use of acid to test metals for gold by the early miners.
If the metal passed the acid test, it was pure gold. If metal failed the acid test by corroding from the acid, it was a base metal and of no value. Under current assets, the company would include cash including the foreign currency, short term investments, accounts receivablesinventoriesprepaid expenses etc. Current Liabilities are liabilities which are due in the next 12 months or less.
Quick Ratio | Acid Test | Formula | Example | Calculation
Under current liabilities, the firms would include accounts payablesales taxes payable, income taxes payable, interest payable, bank overdrafts, payroll taxes payable, customer deposits in advance, accrued expenses, short term loans, current maturities of long term debt etc.
We look at quick ratio in two ways. And under cash equivalent, the organizations take into account money market mutual funds, treasury securitiespreferred stocks which have maturity of 90 days or less, bank certificates of deposits and commercial paper.
These investments are short term which can be liquidated easily within a short period usually within 90 days or less. The sum of money that is yet to be received from the debtors of the company is called accounts receivable; including accounts receivable is criticized by some of the analysts because there is less certainty in liquidation of accounts receivable!
Another advantages of quick ratio is that this ratio is very easy to understand and straight forward. It can help the users of ratio who doe not have deep skill in accounting and financial to understand this ratio easily.
For example, some of operation managers who their KPI are including quick ratio could see and understand the ratio.
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- Quick Ratio - Meaning, Formula and Assumptions
- Quick Ratio
This ratio is measure as the percentages. So if the ratio is higher than the target, that mean some actions are required to fix. Set as KPI and compare its with different size of entity. This ratio compare current assets and current liabilities and the result measure as percentages.
That mean we can compare it to the others entity or competitors which have different size and nature. Although quick ratio has some advantages, its also has certain disadvantages that the users especially the specialist who is responsible for analyst and interpret this ratio should be aware of. Here are those disadvantages of quick ratio: It is the financial indicator.