Quick ratio
Encyclopedia
In finance
, the Acid-test or quick ratio or liquid ratio measures the ability of a company to use its near cash or quick assets to extinguish or retire its current liabilities
immediately. Quick assets include those current asset
s that presumably can be quickly converted to cash at close to their book value
s. A company with a Quick Ratio of less than 1 can not currently pay back its current liabilities.
Note that Inventory
is excluded from the sum of assets financially.
Ratio are financially viable option for business entities but the liquidity of the liabilities show financial stability.
Generally, the acid test ratio should be 1:1 or higher, however this varies widely by industry. In general, the higher the ratio, the greater the company's liquidity (i.e., the better able to meet current obligations using liquid assets).
Notice that very often Acid test refers instead of Quick ratio to Cash ratio:
There is also another Quick Ratio which is widely used and computed as below
Finance
"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
, the Acid-test or quick ratio or liquid ratio measures the ability of a company to use its near cash or quick assets to extinguish or retire its current liabilities
Current liability
In accounting, current liabilities are often understood as all liabilities of the business that are to be settled in cash within the fiscal year or the operating cycle of a given firm, whichever period is longer...
immediately. Quick assets include those current asset
Current asset
In accounting, a current asset is an asset on the balance sheet which can either be converted to cash or used to pay current liabilities within 12 months...
s that presumably can be quickly converted to cash at close to their book value
Book value
In accounting, book value or carrying value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortization or Impairment costs made against the asset. Traditionally, a company's book value...
s. A company with a Quick Ratio of less than 1 can not currently pay back its current liabilities.
Note that Inventory
Inventory
Inventory means a list compiled for some formal purpose, such as the details of an estate going to probate, or the contents of a house let furnished. This remains the prime meaning in British English...
is excluded from the sum of assets financially.
Ratio are financially viable option for business entities but the liquidity of the liabilities show financial stability.
Generally, the acid test ratio should be 1:1 or higher, however this varies widely by industry. In general, the higher the ratio, the greater the company's liquidity (i.e., the better able to meet current obligations using liquid assets).
Notice that very often Acid test refers instead of Quick ratio to Cash ratio:
There is also another Quick Ratio which is widely used and computed as below
- Total Liabilities excludes Share Capital and Retained Earnings