@

Quick Ratio

The quick ratio is an accounting formula that measures a company's short-term liquidity. Also known as the "acid test" ratio, the quick ratio is a more stringent measurement than the current ratio of a company's ability to meet its most short-term obligations, usually those due within 90 days.

The formula for calculating the quick ratio is:

Quick Ratio = (Cash + Marketable Securities + Receivables)/Current Liabilities

Basically, the quick ratio measures a company's cash on hand and in the bank, plus any securities it can sell quickly and convert into cash, such as stocks or government securities, plus receivables it expects within the next 90 days. Then, the total from those figures is divided by any liabilities that come due in that time. The quick ratio is particularly important in assessing the liquidity of a company that may be under financial pressure in paying its bills.

Example Of A Quick Ratio

For example, let's say a company had total quick assets of US$2 million and US$1.5 million of current liabilities. Its quick ratio would be 1.3 (US$2 million/US$1.5 million = 1.3), indicating a fairly comfortable cushion to pay its most pressing liabilities. By contrast, if its quick assets totaled US$1.5 million and it had US$2 million in current liabilities, its quick ratio would be 0.75, which could be a warning signal.

Importantly, the quick ratio doesn't include inventories and supplies, which are generally less liquid and are included in the current ratio.[1] Likewise, prepayments, which are also included in the current ratio, are excluded from the quick ratio because they can't be easily reversed if the company needs that money in a crisis.

A company's quick ratio should be examined within the context of its industry. A lower than average quick ratio may show that the company will have trouble paying its bills. Conversely, a higher than average figure may indicate some inefficiencies at the firm.

Summary

The quick ratio measures the ability of a company to meet its short-term obligations, and typically those due in the next 90 days. The quick ratio is calculated by dividing the company's cash, cash equivalents, marketable securities, and receivables by its current liabilities. The quick ratio is a more stringent measure of a company's ability to pay its bills than the current ratio, which also includes inventories and supplies and measures the company's ability to meet its obligations over the next year.

References

1

Retrieved 10 Jul 2018 https://www.etf.com/user/login

Disclosure

Any opinions, news, research, analyses, prices, other information, or links to third-party sites contained on this website are provided on an "as-is" basis, as general market commentary and do not constitute investment advice. The market commentary has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and it is therefore not subject to any prohibition on dealing ahead of dissemination. Although this commentary is not produced by an independent source, FXCM takes all sufficient steps to eliminate or prevent any conflicts of interests arising out of the production and dissemination of this communication. The employees of FXCM commit to acting in the clients' best interests and represent their views without misleading, deceiving, or otherwise impairing the clients' ability to make informed investment decisions. For more information about the FXCM's internal organizational and administrative arrangements for the prevention of conflicts, please refer to the Firms' Managing Conflicts Policy. Please ensure that you read and understand our Full Disclaimer and Liability provision concerning the foregoing Information, which can be accessed here.

Risk Warning: Our service includes products that are traded on margin and carry a risk of losses in excess of your deposited funds. The products may not be suitable for all investors. Please ensure that you fully understand the risks involved.