Quick ratio formula
What is the quick ratio and, what does it tell you?
The quick ratio tells you the ability of a company to use its quick assets, for its liabilities immediately. In addition to that, when settling the liabilities of the company, this ratio indicates that the company does not need to borrow any money or sell its inventory. The quick ratio is also known as the acid-test ratio.
The difference between the Current Ratio and Quick Ratio?
Both the quick ratio and the current ratio used to measure a company’s short term liquidity.
The quick ratio doesn't include current assets that are more difficult to liquidate for the calculation. For example, inventory is not used when calculating the quick ratio. On the other hand, the current ratio takes those current assets into the account. Due to this, Investors say the quick ratio is a more conservative measurement of a company’s liquidity.
What does it mean by a higher quick ratio?
A higher the quick ratio value is a good sign for investors since it indicates the company has better liquidity and financial health.
If a company has a quick ratio higher than 1, which means the company can instantly settle its current liabilities.
What does it mean by a lower quick ratio?
A lower quick ratio value is not a good sign for investors since it indicates the company may struggle to pay its debts.
If a company having a quick ratio lower than 1, means the company cannot instantly settle its current liabilities. So it might take some time to settle everything.
How to use the quick ratio?
A company with a quick ratio near to 1 can be a better option for investors since the company has enough quick assets to instantly liquidate to pay its current liabilities.
So never take decisions by only looking at sales quick ratio. Always analyze as possible by considering different factors like other ratios and business news. Always try to use multiple ratios combinedly to get a more clear picture of a company.