Quick Ratio: Definition, Formula and Usage

what does a high quick ratio mean

A solid Quick Ratio can also make a company attractive to lenders and creditors. They’ll be more willing to give you loans or credit if you’re financially sound and ready to meet your short-term obligations. It tells you if you have enough money in the bank to pay your bills right away. But if you don’t have enough money and need to borrow or scramble to pay your bills, it’s like having a low Quick Ratio, which means you might struggle with your short-term finances. Individual investors who pick their own stocks instead of buying index funds or actively managed mutual funds may want to consider the quick ratio as part of their analyses.

  • A quick ratio above 1.0 indicates a company has enough quick assets to cover its current liabilities.
  • Cash, cash equivalents, and marketable securities are a company’s most liquid assets.
  • The ideal ratio depends greatly upon the industry that the company is in.
  • On the other hand, counting only very immediate debts is ultimately more accurate but can be time-consuming and less applicable over a fiscal quarter or year.
  • Many business professionals use the quick ratio to check in on their company’s financial status.

While the quick ratio is not a perfect indicator of liquidity, it is one tool that analysts use to get a snapshot of how well a company can meet its short-term obligations. Quick ratios are very popular with analysts looking at the liquidity of a business. Quick ratios have an advantage over the current ratio in that they exclude inventory from the equation.

Quick Ratio vs Current Ratio

These assets are, namely, cash, marketable securities, and accounts receivable. These assets are known as “quick” assets since they can quickly be converted into cash. The quick ratio looks at only the most liquid assets that a company has available to service short-term debts and obligations.

Total current liabilities are often calculated as the sum of various accounts including accounts payable, wages payable, current portions of long-term debt, and taxes payable. The quick ratio is an indicator of a company’s short-term liquidity position and measures a company’s ability to meet its short-term obligations with its most liquid assets. While you can sell anything quickly if you’re willing to drop your price low enough, an asset is only a quick asset if you can sell it quickly at its actual value. If a company’s financials don’t provide a breakdown of its quick assets, you can still calculate the quick ratio.

Quick Ratio: How to Calculate & Examples

The quick ratio is also fairly easy and straightforward to calculate. It’s relatively easy to understand, especially when comparing a company’s liquidity against a target calculation such as 1.0. The quick ratio can be used to analyze a single company over a period of time or can be used to compare similar companies. It’s important to compare the quick ratio of a company with its peers.

what does a high quick ratio mean

Presumably it would have some non-liquid assets left over, so this isn’t an especially dangerous position. The quick ratio is similar to the current ratio in that it measures what does a high quick ratio mean a company’s ability to pay its liabilities with assets. However, the current ratio calculates all of its current assets, not just the ones quickly converted to cash.

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