_edited.png)
Worried about where your cash is going? Or concerned about your company's ability to meet new obligations? Well, get to know the quick ratio, which is like a financial lifeline. It reassures you about the company's ability to settle current liabilities (debts that need to be paid within a short period).
Simply put, the quick ratio is a stronger indicator than the current ratio for measuring a company's short-term liquidity. Why? Because the quick ratio excludes inventory from the calculation. Converting inventory to cash can take time and effort.
Let's see an example to understand how to calculate the quick ratio:
A clothing company owns a retail store, and we want to determine its ability to settle current liabilities based on this data:
Item | Amount (EGP) |
Cash | 20,000 |
Quick Sale Assets (Short-term investments + Accounts Receivable) | 30,000 |
Accounts Receivable (Debtors yet to pay) | 40,000 |
Total Current Liabilities (Two months' salaries + Rent + Supplier invoices) | 50,000 |
The calculation for the quick ratio becomes:
Quick Ratio = (Cash + Quick Sale Assets + Accounts Receivable) / Current Liabilities = (20,000 + 30,000 + 40,000) / 50,000 = 1.8 (times)The higher the quick ratio, the stronger the company is in settling current liabilities. In this example, the company can cover its obligations roughly one and a half times using its most liquid assets (quick assets).
Excel: Your Friend in Calculating the Quick Ratio
Excel is one of the easiest ways to calculate the quick ratio. Enter your data in separate tables for cash, quick sale assets, accounts receivable, and current liabilities. Then, use a simple formula to calculate the ratio.
When Can Knowing the Quick Ratio Be Useful?
Business Owners: To monitor the company's ability to settle short-term liabilities and determine the need for a loan or payment deferrals.
Banks: To assess loan applications submitted by companies and ensure their ability to repay.
Financial Analysts: To analyze a company's ability to meet its short-term obligations and identify potential risks.
What Can the Quick Ratio Tell Us?
The company's ability to settle current liabilities: A high ratio indicates the company's ability to fulfill its short-term financial obligations.
The efficiency of the company's resource management: Good inventory and accounts receivable management can improve the quick ratio.
Limitations to Consider
The quick ratio is a helpful indicator, but other factors need to be considered, such as debt maturity dates and collection times for accounts receivable.
A high quick ratio is not always positive. It could indicate weak sales or an accumulation of dead stock.
Conclusion
The quick ratio is a crucial indicator of a company's short-term financial health. Monitor the quick ratio regularly and work on improving it to ensure your company's ability to settle current liabilities and achieve continued success.
Learn More about the lectures presented by Al-Assaal in the field of Excel, data analysis, and financial analysis
Our Course of Most Used EXCEL Equations
- Learn more than 30 important EXCEL equations that will help you solve 85% of Excel problems and put you on the path to professionalism.
Comments