Quick Ratio. The quick ratio, also known as acid test ratio, measures whether a company’s current assets are sufficient to cover its current liabilities. Quick ratio is a more cautious approach towards understanding the short-term solvency of a company. For instance, a quick ratio of 1 means that for every $1 of liabilities you have, you have an equal $1 in assets. In the above example, XYZ Company has current assets 2.32 times larger than current liabilities. Generally, the quick ratio should be 1:1 or higher; however, this varies widely by industry. Related Courses. A quick ratio of one-to-one or higher indicates that a company can meet its current obligations without selling fixed assets or inventory, indicating positive short-term financial health. The special characteristic of this ratio from the other Liquidity Ratios is that Quick Ratio taking account only cash and cash equivalent items for … Quick ratio meaning The Quick ratio, also called as Acid test ratio helps in understanding if the company has sufficient assets that can be converted to cash quickly and use the proceeds to pay off its current liabilities. The quick ratio is one of the common ratios used to tell the story of a company's liquidity. Thus, a quick ratio of 1.75X means that a company has $1.75 of liquid assets available to cover each $1 of current liabilities. In general, the higher the ratio… Definition: The quick ratio is a financial liquidity ratio that compares quick assets to current liabilities. A quick ratio of 0.5 would suggest that a company is able to settle half of its current liabilities instantaneously. The higher the quick ratio, the better the company's liquidity position. If the current ratio computation results in an amount greater than 1, it means that the company has adequate current assets to settle its current liabilities. Along with the quick ratio, the current ratio and cash ratio are part of the liquidity picture. Quick Ratio Formula = (Cash and Cash Equivalents + Marketable Securities + Accounts Receivable)/(Current Liabilities) If Current Assets = Current Liabilities, then Ratio is equal to 1.0 -> Current Assets are just enough to pay down the short term obligations. Introduction to Interpretation of Debt to Equity Ratio. Quick Ratio interpretation Quick Ratio is an indicator of company's short-term liquidity. Quick ratio is considered a more reliable test of short-term solvency than current ratio because it shows the ability of the business to pay short term debts immediately.Inventories and prepaid expenses are excluded from current assets for the purpose of computing quick ratio because inventories may take long period of time to be converted into cash and prepaid expenses cannot be used to pay current liabilities.Generally, a quick ratio of 1:1 is considered satisfactory. Quick ratio is an indicator of most readily available current assets to pay off short-term obligations. Quick Ratio is one of the Liquidity Ratios that use to measure the liquidity position of the company, project, investment centre or profit centre. Interpretation of Quick Ratio: As quick ratio eliminates inventory and prepaid expenses for matching against current liabilities therefore it is a more rigorous test of liquidity as compared to Current ratio. It may be defined as the indicated quotient of two mathematical expressions. The ratio tells creditors how much of the company's short term debt can be met by selling all the company's liquid assets at very short notice. The quick ratio is a valuable tool in financial statement analysis but like most metrics, it comes with potential drawbacks. It assists in verifying if the business or company has the capacity to pay off its current liabilities by means of the most liquid assets. A ratio is a simple arithmetical expression of the relationship of one number to another. Quick ratio formula is: The ratio refers to an arithmetical expression, representing the proportion of one thing with respect to another. Quick Ratio (Acid Test Ratio) – an indicator of a firm’s short-term liquidity measuring how well company can meet its short-term obligations with its highly liquid assets, such as cash and equivalents, marketable securities and receivables. Business Ratios Guidebook The Interpretation of Financial Statements Question: 2018 2017 Ratio Current Ratio Interpretation Quick Ratio Debt Equity Ratio Inventory Turnover Ratio Receivables Turnover Ratio Total Assets Turnover Ratio Profit Margin (Net Margin) Ratio Return On Assets Ratio. When used along with Current ratio it gives a clearer picture of business's liquidity position. It is calculated as a company's Total Current Assets excludes Total Inventories divides by its Total Current Liabilities.Burberry Group's quick ratio for the quarter that ended in Sep. 2020 was 1.49.. Burberry Group has a quick ratio of 1.49. Quick ratio is viewed as a sign of a company's financial strength or weakness; it gives information about a company’s short term liquidity. In business, the quick ratio is obtained by subtracting inventories from current assets and then dividing by current liabilities. This question hasn't been answered yet Ask an expert. If Current Assets < Current Liabilities, then Ratio is less than 1.0 -> a problem situation at hand as the company does not … It is part of ratio analysis under the section of the leverage ratio. The quick ratio is a simple formula that’s calculated by first adding up a company’s cash-on-hand, and any other cash equivalents such as accounts receivable amounts, short-term investments, and marketable securities. It measures the ability to use its quick assets (cash and cash equivalents, marketable securities and accounts receivable) to pay its current liabilities. The quick ratio is also known as the acid-test ratio or quick assets ratio. Quick Ratio Analysis Any business should be able to meet its short-term debts, expenses, and other bills when due, and it is something that will enable them to maintain a good rapport with investors. the assets which are easily convertible to cash in a short duration. Conversely, quick ratio is a measure of a company’s efficiency in meeting its current financial liabilities, with its quick assets, i.e. Liquidity is your ability to quickly generate cash to cover short-term liabilities in a pinch. Inventories are also excluded because they are not directly convertible to cash, i.e. Quick ratio shows the extent of cash and other current assets that are readily convertible into cash in comparison to the short term obligations of an organization. This ratio is similar to current ratio, as both of them measure the short-term solvency of a firm. The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets. The quick ratio, defined also as the acid test ratio, reveals a company’s ability to meet short-term operating needs by using its liquid assets.It is similar to the current ratio, but is considered a more reliable indicator of a company’s short-term financial strength. In this case, the presence of a large proportion of inventory is masking a relatively low level of liquidity, which could be a concern to a lender or supplier. Jul 24 Back To Home Quick Ratio Analysis Quick Ratio Analysis Definition. The current ratio of the business is 3:1, while its quick ratio is a much smaller 1:1. Quick assets generally include cash, cash equivalents, and accounts receivable. The quick ratio number is a ratio between assets and liabilities. It includes only the quick assets which are the more liquid assets of the company. It is defined as the ratio between quickly available or liquid assets and current liabilities. Such assets that can be converted into Cash in a … The quick ratio assigns a dollar amount to a firm's liquid assets available to cover each dollar of its current liabilities. Interpretation of Quick Ratio / Acid Test Ratio. Quick ratio evaluates the liquidity of a company by comparing its cash plus almost cash current assets with its entire current financial obligations. In finance, the quick ratio, also known as the acid-test ratio is a type of liquidity ratio, which measures the ability of a company to use its near cash or quick assets to extinguish or retire its current liabilities immediately. Quick Ratio Definition. It is particularly useful in assessing liquidity situation of companies in a crunch situation, i.e. In this article, we will discuss the Interpretation of Debt to Equity Ratio.The debt to Equity ratio helps us to understand the financial leverage of the company. 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