Definition of Quick Ratio
The quick ratio indicates the company’s liquidity position at a particular time and it also tells the company’s capacity to pay short term liabilities without using its inventory costs and getting any extra financial help. This ability of paying off the liabilities is achieved by having assets in the company that can be converted into cash. These assets are called quick assets.
As quick ratio uses the company’s quick assets to pay off the liabilities it is also called as acid ratio. The other name for this ratio is liquidity ratio, as it indicates the company’s liquidity.
What is Quick Ratio?
Quick ratio measures the company’s liquid assets or quick assets and the company’s liabilities. The liquid assets are those current assets that can be easily converted into cash while liabilities are the debts that the company owes to certain organisations.
Experts have suggested that the quick ratio of 1 or more means that the company has enough or more quick assets that can be used to pay off the liabilities but a quick ratio of less than one may be a problem as this means your liabilities are more than your assets.
This helps you to know if your company is capable of handling your liabilities on your own without using your company’s inventory or seeking any outside financial help.
Quick ratio along with other financial tools is a very helpful measure to give you a clear insight into your business and finances which will help you manage your finances better in the future. Other than that, it is also used by investors as a point to judge whether or not to invest in a company. Before making any investments, the investors will want to know if the company is capable of handling its debts without outside help.
What is the formula for quick ratio?
The formula for quick ratio is :
Quick ratio = CE + MS + AR / CL
Or
Quick ratio = CA − I − PE / CL
Where, CE = Cash and equivalents MS = Marketable securities AR = Accounts receivable CL = Current liabilities CA = Current assets I = Inventory PE = Prepaid expenses
