The Quick Ratio
The quick ratio or asset test ratio is an indicator of a company’s short term liquidity. It measures a company’s ability to meet its short term obligations with its assets. The formula looks like this Quick Ratio (asset test ratio) = (Current Assets-Inventory) / (Current Liabilities) Current assets and Current liabilities are all debts or assets that a given company will have within 1 year. For instance if a company has a loan out which they will have to repay in 9 months it is a current liability even though they will not have to pay that money out for a while. This ratio is more conservative than the Current ratio because it takes out the inventory from its current assets. Inventory can be hard to sell for some companies; therefore taking it out of the equation can help us understand the least a company would be able to raise in a short period of time.Typically you want to see a company with an asset test ratio above 1. This means the firm can meet or even exceed its short term liabilities. Some companies may naturally have a higher ratio then others simply because of the industry that they are in. To get around this it is important to look at this ratio in relation to other companies in the same industry group as the original company. Other Ratios Combining different ratios together is a good way to get an idea of how fundamentally strong a company is. Here are a few other ratios. Cash Current Debt Coverage – This helps to determine how well off a company is compared to its debt. PE ratio - This looks at how much money a company makes compared to the current level of the stock. Enterprise Value - This is a way of measuring a company’s value. |
