How do you calculate the quick ratio?
There are a few different ways to calculate the quick ratio ; each method involves pulling numbers from the financial statements. The quick and easy way is to subtract existing inventories from current assets, then divide the resulting figure by current liabilities. A more accurate version of the quick ratio begins by adding cash and cash equivalents to all accounts receivable and marketable securities. The sum of those items is then divided by current liabilities.
The quick ratio is also known as the acid test ratio. Calculate the quick ratio to estimate a company's ability to meet its short-term financial obligations. It is generally thought of as a more conservative alternative to the current ratio.
Finding Information for the Quick Ratio
For the quicker and simpler version of the quick ratio, you only need the most recent version of the company's balance sheet. sometimes referred to as the statement of financial position.
The longer version of the quick ratio can also be performed
with just the balance sheet, although a more thorough breakdown of the receivables can be found on most income statements. If you want to exclude certain items from a quick ratio analysis, check the notes on the income statement.
When to Check the Quick Ratio
Suppose you were reviewing the balance sheet for a major corporation that is likely to have major capital-intensive expansions, such as Exxon Mobil or General Motors. Large-scale financing is a recipe for lots of liabilities, so it's important to make sure that the company has the cash flow to stay solvent .
You pull several items from each side of the balance sheet. The company's current assets are comprised of cash, marketable securities, receivables and inventory. Its liabilities include payables, accrued expenses, the current portion of long-term debt and (possibly) legal fines.
As long as the company has a ratio of at least 1, it is sufficiently capable of paying back its creditors and meeting other short-term obligations.Source: www.investopedia.com