Skip to main content

Reasons Quick Ratio Is Important To Investors.

Quick Ratio



What do investors look out for when assessing a potential investment opportunity in a company?


When investors consider a business to invest in, they are mostly interested in the profitability of that business.


But they are also interested in the solvency , efficiency and capital structure of the business.


Why would investors be interested in the solvency or liquidity of a business they desire to invest in?


Because it’s important to know if the business under consideration would have the financial capacity to meet its current maturing liabilities. It’s worthy of note that businesses carry out transactions on both credit and cash bases.


The quick ratio (or acid test ratio) is used to test the solvency or liquidity of a business through the ratio analysis of its financial statements.


What is quick ratio or acid test ratio?


The quick ratio is a solvency test that compares the total current assets of a business excluding stock, to its total current liabilities.


The goal of quick ratio is to determine whether a business has sufficient short-term assets (current assets easily convertible to cash) excluding stock, to meet short-term liabilities (current liabilities).


Why is stock excluded in the acid test ratio?


Stock is excluded because it is considered to depend on current and future market forces which may make it almost impossible to convert to cash in the short term. So, stock is deemed to be relatively illiquid


What are current assets and current liabilities?


Current assets or short term assets are assets a business owns, applies to the smooth running of its operations, replaces when necessary and easily converts to cash within a period usually less than or equal to twelve months.


Current liabilities are a business's debts that are usually due for payment to creditors within a period of less than or equal to twelve months.


What is the formula for calculating quick ratio?


Quick ratio is calculated by (Current assets Less Stock)/Current liabilities.


What is a good quick ratio?


A good quick ratio is a 1:1. 


This means that the total current assets (omitting stock) of the business is equal to the total current liabilities.


This article first appeared on Ayi Post.




Labels:

Comments

Post a Comment

Popular posts from this blog

9 High yield savings accounts in Nigeria.

High yield savings account in Nigeria Here are nine Nigerian banks known for offering high-yield savings accounts, as of the latest available data.  The interest rates can vary, so it’s always a good idea to check with the banks directly for the most up-to-date offers. 1. GTBank (Guaranty Trust Bank)    Known for competitive interest rates on savings accounts, including specialized savings products like the GTSave savings account. The GTSave offers a competitive interest rates at 8.175%. 2. Access Bank     Offers a variety of savings products with attractive interest rates, especially on their Access Bank High Interest Savings account. Access bank premier savings accounts attracts interest rate of  8.175%p.a paid monthly. 3. Zenith Bank    Provides various savings products with good returns, including the Zenith Bank High Yield Savings account. Zenith bank has an account called Save4Me. Save4Me  is a savings account with a higher interes...
Post a Comment
Read more

Why is it important to trust each other?

  We lose more by having the habit of not trusting until we have a reason than by choosing to trust first before a reason not to trust any more shows up. Choosing the latter, yes, would lead to unpleasant consequences when those you trust for no reason disappoints. But at least, it would leave the doors to the heart on both ends open, until the heart finds someone trustworthy enough to keep. On the contrary, choosing not trust at all until you have a reason to trust is sure going to make you suspicious of everyone you meet at the first time.  The suspicion could also, lay the foundation to stereotype those who don’t fit into the culture of those you call, “mind”. Suspicion and stereotyping have caused a lot of people to lose opportunities to make great friends and find great team mates to complete them and help them realize their dreams.  It’s not easy for people with difficult-to-trust attitude to change and move in the opposite direction. Making the transition takes t...
Post a Comment
Read more

What is a well-balanced person? How can you become a well-balanced person?

A well-balance person is not enslaved by emotional problems. Good and bad things happen to them as they happen to everyone else. When they receive good things from life, they enjoy them without being carried away by the ephemerality of their values. When life gives them the raw deal, they accept it as one of life’s mysteries which don’t subtract from the real substance of life. And what’s life real substance? Life’s real substance is rooted in the knowledge that happiness is within and its value can’t be decreased or increased by  nothing else, except by you, the owner of your self.     Thomas Merton captured happiness perfectly when he said, "Happiness is not a matter of intensity but of balance and order and rhythm and harmony."
Post a Comment
Read more