How to use quick ratio
- Higher is better
- Above 1 is considered healthy (always use industry average)
- Can be very different between industries
- Can be used to compare companies
Why do investors use quick ratio in their analysis
Shows how fast the company can pay off its short term debts.
Things to be aware of
- Only compare with other companies in the same industry
- Incorporates only most liquid assets
How to calculate quick ratio
- Quick ratio = cash and equivalents plus marketable securities plus accounts receivable / current liabilities]
Real life example
The quick ratio measures the same thing as the current ratio, only it uses the most liquid assets a company has. Meaning, the assets that can be sold for cash the easiest and fastest.
As the quick ratio only incorporates the most liquid assets, you should also check the current ratio which also includes less liquid assets. But they may be harder to sell.
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