Examples of quick earnings
Liquid current assets are current assets which can be quickly converted to cash without any significant decrease in their value. Liquid current assets typically include cash, marketable securities and receivables. Quick ratio is expressed as a number instead of a percentage.
Quick assets are therefore considered to be the most highly liquid assets held by a company. They include cash and equivalents, marketable securitiesand accounts receivable. Companies use quick assets to calculate certain financial ratios that are used in decision making, primarily the quick ratio. Quick assets are considered to be a more conservative measure of a company's liquidity than current assets since it excludes inventories. The quick ratio is used to analyze a company's immediate ability to pay its current liabilities without the need to sell its inventory or use financing.
Quick ratio is a stricter measure of liquidity of a company than its current ratio. While current ratio compares the total current assets to total current liabilities, quick ratio compares cash and near-cash current assets with current liabilities.
Quick assets are current assets that can be converted to cash within 90 days or in the short-term. Cash, cash equivalents, short-term investments or marketable securities, and current accounts receivable are considered quick assets.
Since near-cash current assets are less than total current assets, quick ratio is lower than current ratio unless all current assets are liquid. Quick ratio is most useful where the proportion of illiquid current assets to total current assets is high.
However, quick ratio is less conservative than cash ratioanother important liquidity parameter.
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Formula Quick ratio is calculated by dividing liquid current assets by total current liabilities. Liquid current assets include cash, marketable securities and receivables.
Examples examples of quick earnings government treasury bills, shares listed on a stock exchange, etc. Receivables include accounts receivable, notes receivable, etc.
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Another approach to calculation of quick ratio involves subtracting all illiquid current assets from total current assets and dividing the resulting figure by total current liabilities.
It is particularly useful in assessing liquidity situation of companies in a crunch situation, i. Inventories are also excluded because they are not directly convertible to cash, i. Quick ratio should be analyzed in the context of other liquidity ratios such as current ratio, cash ratio, etc.
A quick ratio lower than the industry average might indicate that the company may face difficulty honoring its current obligations. Alternatively, a quick ratio significantly higher than the industry average highlights inefficiency as it indicates that the company has parked too much cash in low-return assets.
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A quick ratio in line with industry average indicates availability of sufficient good quality liquidity.