financial ratios
Quick Ratio Analysis
-The acid test ratio measures the liquidity Higher quick ratios are more favorable of a company by showing its ability to payfor companies because it shows there are off its current liabilities with quick assets. If more quick assets than current liabilities. A a firm has enough quick assets to cover its company with a quick ratio of 1 indicates total current liabilities, the firm will be able that quick assets equal current assets. This to pay off its obligations without having to also shows that the company could sell off any long-term or capital assets off its current liabilities without selling any long-term assets. An acid ratio of 2 shows Since most businesses use their long-term that the company has twice as many assets to generate revenues, selling off quick assets than current liabilities. these capital assets will not only hurt the company it will also show investors that current operations aren't making enough profits to pay off current liabilities.
Current Ratio Analysis
-The current ratio helps investors and credi- -If a company has to sell of fixed assets tors understand the liquidity of a company to pay for its current liabilities, this usually and how easily that company will be able means the company isn't making enough to pay off its current liabilities. This ratio ex- from operations to support activities. In presses a firm's current debt in terms of other words, the company is losing money current assets. So a current rat tio of 4 would Sometimes this is the result of poor collec- mean that the company has 4 times more tions of accounts receivable. current assets than current liabilities. The current ratio also sheds light on the A higher current ratio is always more favor- overall debt burden of the company. If a able than a lower current ratio because it company is weighted down with a current shows the company can more easily make debt, its cash flow will suffer. current debt payments.
Quick Ratio Formula
Cash + Cash Equivalents+Short Term Investments+ Current Receivables /Current Liabilities
Current Ratio Formula
Current Ratio = Current Assets / Current Liabilities
Current Ratio
Explanation -The current ratio is a liquidity and efficien- be cash in the short term. cy ratio that measures a firm's ability to This means that companies with larger pay off its short-term liabilities with its cur-amounts of current assets will more easily rent assets. The current ratio is an impor- be able to pay off current liabilities when tant measure of liquidity because short- they become due without having to sell term liabilities are due within in the next year. year. off long-term, revenue generating assets This means that a company has a limited amount of time in order to raise the funds to pay for these liabilities. Current assets like cash, cash equivalents, and market able securities can easily
Quick Ratio
Explanation The quick ratio or acid test ratio is liquid- -The quick ratio is often called the acid ity ratio that measures the ability of a com test ratio in reference to the historical use pany to pay its current liabilities when they of acid to test metals for gold by the early come due with only quick assets. Quick miners. If the metal passed the acid test, it assets are current assets that can be con- verted to cash within 90 days or in theby was pure corroding from the gold. If metal failed the acid test acid, it was a base short-term. Cash, cash equivalents, short- metal and of no value term investments or marketable securities. and current accounts receivable are con The acid test of finance shows how well sidered quick assets. a company can quickly convert its assets into cash in order to pay off its current abilities. It also shows the level of quick as- sets to current liabilities.
