Evaluating the Effectiveness of Sports Sponsorships
In the previous article, we have already seen how multinational companies spend large sums of money in order to buy the rights to be associated with a large sporting event. Companies are willing to provide these resources since they feel that they will be able to meet their corporate objectives. Sports sponsorships are purely commercial […]
Different Asset Classes in which Pension Funds can Invest
Pension funds have a very large amount of money at their disposal. However, that does not mean that the management of these funds can deploy this money as per their will. Pension funds are highly regulated and the asset classes in which they can invest in are limited. Over the years, the limitations have been […]
Pros and Cons of Scalable Business Models
Scalable business models are the latest buzzword in entrepreneurial circles all across the world. Most new-age founders aspire to make their businesses more scalable. However, scalability has to be built into a business before it actually exists. It is for this reason, that the decision to scale or not becomes strategic and something that founders […]
Prospectus in Investment Banking – Part 1
The job of an investment banker includes enabling the flow of information between the company and its investors. When a company is going public for the first time, investors do not have any information about the company. As such, they do not have a strong basis for making a well-informed decision. Hence, it is the […]
The Problem with Postal Banking
Veteran American Senator Bernie Sanders, as well as Alexandria Ocasio-Cortez, who has now become the voice of the Democrats, are of the opinion that the United States Postal Services (USPS) should be allowed to perform the functions of a bank. According to them, this solves two important problems. Firstly, there is the problem of financial […]
The quick ratio is a variation of the current ratio. However, a quick ratio is considered by many to be a more conservative estimate than the current ratio. This characteristic fetches it the nickname of being the “Acid test ratio”.
The difference between the current ratio and the quick ratio is the fact that quick ratio excludes the inventory. In theory this may seem like a small difference, however in practice anyone who is aware about the difficulties involved in liquidating inventories at the right price will vouch for the conservativeness of this ratio. The quick ratio has been discussed in greater detail in this article.
Quick Ratio = (Current Assets - Inventories) / Current Liabilities
The quick ratio checks the company’s performance to fulfill its obligations in a situation when it is not able to liquidate its inventory. In such a situation the company will have to pay its current liabilities out of the cash and cash equivalents that it has on hand and the amount of money it has already tied up in accounts receivables. The ideal quick ratio is considered to be 1:1. However, this varies widely according to the different credit cycles prevalent if different industries. Hence an analyst must look at competing firms and the industry average before forming opinions based on the current ratio.
There are no assumptions made regarding the inventory, because it is excluded from the calculation of this ratio. However, there are assumptions made about debtors and the fact that they will pay up on time to finance the payment of short term liabilities that a company has on hand.
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