The quick ratio, also known as the acid-test ratio, helps investors determine a company's short-term liquidity.A company must hold enough liquid assets to cover their short-term debt like short-term bank loans or payroll or else face a possible liquidity crisis, which could lead to bankruptcy.
Driven by the frenzy of WallStreetBets investors, US Cinema AMC entertainment holdings have become one of the most popular stocks of the market in the first half of 2021. However, there is at least one person who is less happy about this madness, which it’s Jianlin Wang, the previous stakeholder of AMC and the founder of Dalian Wanda Group. The company sold almost all of its stake in AMC around May just before AMC stock’s 400% rally, due to a cash shortfall. Or in other words, the company runs out of liquidity. The urgent cash or liquidity requirement of Wanda Group caused the company to miss the bigger piece of the cake.
What is liquidity and how do we use the quick ratio to measure it.
The quick ratio is an indicator of a company's short-term liquidity position. It is used to determine how a business could pay off its short-term liabilities with its quick assets, which are any current assets that are convertible into cash within 90 days.
Its formula would be:
Quick Ratio = [Cash & equivalents + marketable securities + accounts receivable] / Current liabilities
A result of 1 means a normal quick ratio. It indicates the company has just enough quick assets to cover its current liability. A quick ratio of less than 1 indicates that the company may not be able to pay off its current liabilities with its quick asset, while a company having a quick ratio larger than 1 could pay off its current liability instantly.
What if the company has unhealthy liquidity ratios?
In this circumstance, then the company could face a liquidity crisis. To avoid loan default and unpaid wages, which would lead to even serious reputation damage, the company must act immediately to finance enough current assets, by sell assets, take on debt, or issue more shares of equity to paid off its current liability to avoid serious consequence, such as bank refuse to provide loan and stock selloff. A common industry that might face such issues includes but is not limited to real estate, pharmaceutical industry, manufacture, etc.
liquidity ratios comparison:
Current Ratio - Measures the number of current assets over current liabilities (most lenient).
Quick Ratio - Measures the amount of quick asset that can be used to pay current liabilities (stricter)
Cash Ratio - Measures the amount of cash that can be used to pay liabilities (even stricter)
How to locate it in moomoo:
Select a stock – Analysis – Quick Ratio in Key Indicators
Select a stock – Scroll to the right – Financial – Scroll down – Quick Ratio in Key Indicators