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What is the Quick Ratio?

Views 25KNov 1, 2023
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Key Takeaways

  • The quick ratio measures a company's ability to pay its current liabilities by readily converting some of its current assets into cash

  • In theory, the higher the quick ratio, the better a company's liquidity and financial health

  • The quick ratio is considered a more conservative measure than the current ratio because the latter includes all current assets to cover current liabilities

Understanding Quick Ratio

The quick ratio measures a company's ability to pay its current liabilities without liquidating its inventory or obtaining additional financing.

The formula to calculate the quick ratio is:

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or

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In theory, the higher the quick ratio, the better a company's liquidity and financial health; the lower the ratio, the more likely the company will struggle with paying liabilities.

The quick ratio is more conservative than the current ratio because the former excludes inventory and other less liquid current assets. The quick ratio considers only assets that can be readily converted into cash. On the other hand, the current ratio includes inventory and prepaid expenses. Inventories take time to be liquidated for most companies. Prepaid expenses, though an asset, cannot be used to pay current liabilities, so they're omitted from the quick ratio.

Example of Quick Ratio

The chart below is the balance sheet from $Apple(AAPL.US)$ annual report for the fiscal year ended September 25, 2021.

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The annual report shows:

The Cash & Equivalent of $Apple(AAPL.US)$ were 34.94 Billion on September 25, 2021.

The Current Marketable Securities of $Apple(AAPL.US)$ were 27.699 Billion on September 25, 2021.

The Accounts Receivable & Other Receivables of $Apple(AAPL.US)$ were 26.278 + 25.228 = 51.506 Billion on September 25, 2021.

The total current liabilities of $Apple(AAPL.US)$ were 125.481 Billion on September 25, 2021.

So, according to the formula:

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Disclaimer: This content is for informational and educational purposes only and does not constitute a recommendation or endorsement of any specific investment or investment strategy.

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