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Quick Definition

Measures a company’s ability to meet its debt obligations.

There's More to Financial Analysis Than You Think...

The Financial Analysis Success Kit can help!

Why you should take a look at the Financial Analysis Success Kit:

We've combined all our highly popular financial analysis tools into one mega-financial-analysis-kit that will save you hundreds of dollars if purchased separately. The kit contains 9 files packed with the most important financial ratio analysis tools you can find to help rocket your way to mastering financial analysis. The kit includes:

  1. The eBook "Learn Ratio Analysis In Minutes"

  2. The Learn Financial Ratio Analysis Excel Spreadsheet (2 versions!)

  3. A BONUS eBook..."Key Financial Statement Terms"

  4. Another HUGE BONUS...Five-Part Financial Ratio Cheat Sheet Series

The result? You get all these professionally created tools for a great low price.

Learn more on our product page:

Click the button to learn more about the Financial Analysis Success Kit

 

financial ratio analysis success kit

Click the button to learn more about the Financial Analysis Success Kit

Explanation of Quick Ratio

Also called the Acid-Test Ratio, the current ratio compares all the Total Current Assets of a company to all the Total Current Liabilities just like the Current Ratio, but the Inventories are subtracted from the Current Assets. Why? Not every company can quickly convert its Inventories into cash in the event it had to pay all its Current Liabilities.

The Quick Ratio is a more rigorous method to test the company’s ability to meet its current debt load. You can make the test even tougher by also subtracting off the Accounts Receivable and prepaid expenses. This will pretty much leave only the truly current and liquidable assets.

Importance of Quick Ratio

If a company you are analyzing looks good while testing it against the Current Ratio, then the Quick Ratio should be your next test to apply. Companies with steadily rising Inventories may look good with the Current Ratio, but will have a deteriorating effect on the Quick Ratio, since we subtract the Inventories out. The Quick Ratio rising over time is favorable.