Quick Ratio
How to use quick ratio
A quick ratio of 0,8 means the company can pay off $0,8 for each $1 in debt (using most liquid assets).
- Higher is better.
- Above 1 is considered healthy but always comparethe company to the industry mean.
- 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. This shows if the company can survive emergencies due to market changes or other reasons.
The three steps every investor should look at:
- What is the current Quick Ratio?
- How does it compare to the industry?
- What is the trend?
Things to be aware of
- Only compare with other companies in the same industry.
- Incorporates only most liquid assets.
How to calculate quick ratio
Real life example
A real life example of Tesla. You need the following data to determine operating ratio:
- Quick ratio = cash and equivalents + marketable securities + accounts receivable \ current liabilities
- ($18,324,000 + $519,000 + $2,081,000) \ $21,821,000 = 0.95
Tesla can pay off $0,95 for each $1 dollar in debt in the short term (using only fast liquid assets).
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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