{"id":6342,"date":"2022-07-21T15:38:24","date_gmt":"2022-07-21T15:38:24","guid":{"rendered":"https:\/\/intelekbusinessvaluations.com\/en-us\/?p=6342"},"modified":"2023-01-13T22:02:04","modified_gmt":"2023-01-13T22:02:04","slug":"quick-ratio","status":"publish","type":"post","link":"https:\/\/intelekbusinessvaluations.com\/en-us\/financial-statements\/quick-ratio\/","title":{"rendered":"Quick Ratio"},"content":{"rendered":"<p>This post will take a dive into the concept of the quick ratio and its interpretation, along with an example.<\/p>\n<p>The quick ratio, commonly referred to as the acid-test ratio, measures the ability of a business to pay its short-term liabilities using only the\u00a0<a href=\"https:\/\/intelekbusinessvaluations.com\/en-us\/financial-statements\/current-assets\/\"><strong>current assets<\/strong>\u00a0<\/a>that are readily convertible into cash. These \u201cquick\u201d assets are mainly cash and cash equivalents, marketable securities, and\u00a0<a href=\"https:\/\/intelekbusinessvaluations.com\/en-us\/financial-statements\/accounts-receivable\/\"><strong>accounts receivable<\/strong><\/a>.<\/p>\n<h2><strong>Quick Ratio Formula<\/strong><\/h2>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-6895\" src=\"https:\/\/intelekbusinessvaluations.com\/en-au\/wp-content\/uploads\/2022\/07\/quick-ratio-formula.png\" alt=\"\" width=\"876\" height=\"212\" \/><\/p>\n<p>As observed above, the quick ratio measures a company\u2019s capacity to pay its current liabilities without needing to sell its inventory or obtain additional financing.<\/p>\n<p>Inventories are excluded from the quick ratio, as it may take too long to convert inventory into cash to cover pressing liabilities. Also, prepaid expenses are excluded, as they cannot be used to pay other liabilities.<\/p>\n<h2><strong>Interpretation of Quick Ratio<\/strong><\/h2>\n<p>Generally, the higher the quick ratio, the better it is for the business. However, one must note that quick ratio is an indicator of solvency of an entity, and must be analyzed over a period of time and also in the context of the industry the company operates in.<\/p>\n<p>A quick ratio that is greater than industry average may suggest that the company is investing too many resources in working capital that may be used more profitably elsewhere.<\/p>\n<p>A quick ratio that\u2019s lower than the industry average may suggest that the company is taking too much risk by not maintaining an appropriate buffer of liquid resources. Alternatively, a company may have a lower quick ratio due to better credit terms with suppliers than the competitors.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-7171\" src=\"https:\/\/intelekbusinessvaluations.com\/en-us\/wp-content\/uploads\/2022\/07\/Quick-Ratio-1-300x188.jpg\" alt=\"Quick Ratio\" width=\"700\" height=\"438\" srcset=\"https:\/\/intelekbusinessvaluations.com\/en-us\/wp-content\/uploads\/2022\/07\/Quick-Ratio-1-300x188.jpg 300w, https:\/\/intelekbusinessvaluations.com\/en-us\/wp-content\/uploads\/2022\/07\/Quick-Ratio-1-1024x640.jpg 1024w, https:\/\/intelekbusinessvaluations.com\/en-us\/wp-content\/uploads\/2022\/07\/Quick-Ratio-1-768x480.jpg 768w, https:\/\/intelekbusinessvaluations.com\/en-us\/wp-content\/uploads\/2022\/07\/Quick-Ratio-1.jpg 1296w\" sizes=\"(max-width: 700px) 100vw, 700px\" \/><\/p>\n<h2><strong>An Example of Quick Ratio<\/strong><\/h2>\n<p>Company XYZ holds the following:<\/p>\n<ul>\n<li>cash and cash equivalents \u2013 $15 million<\/li>\n<li>marketable securities \u2013 $10 million<\/li>\n<li><a href=\"https:\/\/intelekbusinessvaluations.com\/en-us\/financial-statements\/accounts-receivable\/\"><strong>accounts receivable<\/strong><\/a>\u00a0\u2013 $20 million<\/li>\n<li>inventory \u2013 $35 million<\/li>\n<li>short-term debt \u2013 $10 million<\/li>\n<li><a href=\"https:\/\/intelekbusinessvaluations.com\/en-us\/financial-statements\/accounts-payable\/\"><strong>accounts payable<\/strong><\/a>\u00a0\u2013 $20 million<\/li>\n<li>income tax payable \u2013 $30 million<\/li>\n<\/ul>\n<p>Therefore, the quick ratio will be calculated as such:<\/p>\n<p>Quick Assets = Cash and Cash equivalents + Marketable Securities +\u00a0<a href=\"https:\/\/intelekbusinessvaluations.com\/en-us\/financial-statements\/accounts-receivable\/\"><strong>Accounts Receivable<\/strong><\/a><\/p>\n<p>Quick Assets = $45 million<\/p>\n<p>Current Liabilities = Short-Term Debt +\u00a0<a href=\"https:\/\/intelekbusinessvaluations.com\/en-us\/financial-statements\/accounts-payable\/\"><strong>Accounts Payable<\/strong>\u00a0<\/a>+ Income Tax Payable<\/p>\n<p>Current Liabilities = $60 million<\/p>\n<p>Thus:<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-6896\" src=\"https:\/\/intelekbusinessvaluations.com\/en-au\/wp-content\/uploads\/2022\/07\/quick-ratio-formula-2.png\" alt=\"\" width=\"865\" height=\"139\" \/><\/p>\n<p>Quick Ratio = 0.75<\/p>\n<p>This means that company XYZ will be able to pay 75% of its current liabilities using assets that can be readily converted into cash.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>This post will take a dive into the concept of the quick ratio and its interpretation, along with an example. The quick ratio, commonly referred to as the acid-test ratio, measures the ability of a business to pay its short-term liabilities using only the\u00a0current assets\u00a0that are readily convertible into cash. These \u201cquick\u201d assets are mainly [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":6483,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[52],"tags":[67,139,146,147],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v17.9 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Quick Ratio - Intelek Business Valuations United States<\/title>\n<meta name=\"description\" content=\"The quick ratio, commonly referred to as the acid-test ratio, measures the ability of a business to pay its short-term\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/intelekbusinessvaluations.com\/en-us\/financial-statements\/quick-ratio\/\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"IntelekSiteAdmin\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"3 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"WebSite\",\"@id\":\"https:\/\/intelekbusinessvaluations.com\/en-us\/#website\",\"url\":\"https:\/\/intelekbusinessvaluations.com\/en-us\/\",\"name\":\"Intelek Business Valuations United States\",\"description\":\"Valuations and Advisory United States\",\"potentialAction\":[{\"@type\":\"SearchAction\",\"target\":{\"@type\":\"EntryPoint\",\"urlTemplate\":\"https:\/\/intelekbusinessvaluations.com\/en-us\/?s={search_term_string}\"},\"query-input\":\"required name=search_term_string\"}],\"inLanguage\":\"en-US\"},{\"@type\":\"ImageObject\",\"@id\":\"https:\/\/intelekbusinessvaluations.com\/en-us\/financial-statements\/quick-ratio\/#primaryimage\",\"inLanguage\":\"en-US\",\"url\":\"https:\/\/intelekbusinessvaluations.com\/en-us\/wp-content\/uploads\/2022\/07\/quick-ratio.jpg\",\"contentUrl\":\"https:\/\/intelekbusinessvaluations.com\/en-us\/wp-content\/uploads\/2022\/07\/quick-ratio.jpg\",\"width\":1152,\"height\":720,\"caption\":\"quick-ratio\"},{\"@type\":\"WebPage\",\"@id\":\"https:\/\/intelekbusinessvaluations.com\/en-us\/financial-statements\/quick-ratio\/#webpage\",\"url\":\"https:\/\/intelekbusinessvaluations.com\/en-us\/financial-statements\/quick-ratio\/\",\"name\":\"Quick Ratio - 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