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Quick Ratio
What is Quick Ratio? Quick ratio is a more stringent version of current ratio which measures a company’s ability to meet its obligations. In finance, quick ratio measures the ability of a company to retire or extinguish its current liabilities with its near cash assets or quick assets. Quick or current assets are assets than can be convert into cash at or close to their book value. Quick ratio is often referred as Acid Test.
Quick ratio is a more conservative measure of a company’s ability to pay off its debts since inventory doesn’t get converted to cash very quickly.
Generally a ratio of 1 or higher tells us that a company is able to meet all its current liabilities with its current assets. A large ratio indicates a company being very sustainable in business. However, there are exception to this based on industries and certain long term debt situations.
Use the Quick Ratio Calculator above to calculate. Below is an example of quick ratio
Example:
A company has current assets of $75,000 and which include inventory of $15,000. The company has short term liabilities of $65,000. Calculate the Quick ratio and determine if the company is in good standing.
Step 1:
Calculate the current assets without inventory.
$75,000 - $15,000 = $60,000
Step 2:
Calculate the current liabilities. In this case the liabilities are $65,000
Step3:
Calculate the ratio
Quick Ratio = $65,000/$65,000 = 1
Since the Quick ratio is 1 the company has 1 dollar for each dollar it owes. This is not very sustainable way to run a business.
Suggested Calculators
Current Ratio – Calculate all assets liabilites automatically and find the ratio.
Debt Ratio – Calculate debt ratio. Use the template to automatically calculate your homework.
Debt to equity ratio – calculate debt to equity ratio. Use the template to do your homework.
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