Quick Ratio Formula, Example, and Interpretation

It’s important to compare a company’s Quick Ratio trend to industry benchmarks to get a better understanding of its financial position. The quick ratio tells you how easily a company can meet its short-term financial obligations. A higher ratio indicates a more liquid company while a lower ratio could be a sign that the company is having liquidity issues. It measures the ability of a company to meet its short-term financial obligations with quick assets. Interested parties should take a company’s entire financial situation into account when interpreting its quick ratio. Should interest rates push higher, such a business might have a hard time meeting its long-term debt obligations.

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• This includes cash and cash equivalents, marketable securities, and current accounts receivable.
• As it turns out, all the data you need is contained within a company’s balance sheet.
• For investors, this is invaluable information when considering a potential investment.

The quick ratio measures a company’s ability to pay its short-term liabilities when they come due. It’s also called the acid test ratio, or the quick liquidity ratio, because it uses quick assets, or those that can be converted to cash within 90 days or less. This includes cash and cash equivalents, marketable securities, and current accounts receivable. The Quick Ratio is a measure of a company’s ability to meet its short-term liabilities using its most liquid assets. The Quick Ratio excludes inventory and other less liquid assets since they may not be easily converted into cash in a short period.

How to Calculate the Quick Ratio?

However, it’s essential to consider other liquidity ratios, such as current ratio and cash ratio when analyzing a great company to invest in. This way, you’ll get a clear picture of a company’s liquidity and financial health. A company can’t exist without cash flow and the ability to pay its bills as they come due. By measuring its quick ratio, a company can better understand what resources it has in the very short term in case it needs to liquidate current assets. It’s important to remember that just because a company has a sizable inventory, it doesn’t mean these assets can be easily or swiftly monetized. In the example above, the quick ratio of 1.19 shows that GHI Company has enough current assets to cover its current liabilities.

Quick Ratio vs. Current Ratio

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Note

The quick ratio and current ratio are accounting formulas small business owners can use to understand liquidity. While the quick ratio what is modified adjusted gross income magi uses quick assets, the current ratio uses current assets. The current ratio formula is current assets divided by current liabilities.

What the quick ratio means for the business

The quick ratio is calculated by taking the sum of a company’s cash, cash equivalents, marketable securities, and accounts receivable, and dividing it by the sum of its current liabilities. The quick ratio and current ratio are two metrics used to measure a company’s liquidity. The quick ratio yields a more conservative number as it only includes assets that can be turned into cash within a short period 一 typically 90 days or less. The quick ratio communicates how well a company will be able to pay its short-term debts using only the most liquid of assets. The ratio is important because it signals to internal management and external investors whether the company will run out of cash.

Ideally, accountants and finance professionals should use multiple metrics to understand a company’s status. Accounts payable, or trade payables, reflect how much you owe suppliers and vendors for purchases. For example, if you have a five-year loan for a vehicle, the next 12 months of payments will be a current liability.

It also does not provide information regarding the value of its inventory and marketable securities. While the quick ratio is not a perfect indicator of liquidity, it is one tool that analysts use to get a snapshot of how well a company can meet its short-term obligations. Potential investors can also benefit from examining industry benchmarks for the quick ratio. Some sectors, for example biotechnology and medical instruments & supplies, have particularly high quick ratios. As of April 2024, the former industry had an average quick ratio of over 4.5, while the latter had a quick ratio of 2.78.

He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. We follow strict ethical journalism practices, which includes presenting unbiased information and citing reliable, attributed resources. The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. 11 Financial may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements.