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It is essential for individuals to invest wisely for the rainy days and to make their future secure. What is a Portfolio ? A portfolio refers to a collection of investment tools such as stocks, shares, mutual funds, bonds, cash and so on depending on the investor’s income, budget and convenient time frame. Following are […]
Ordinary Annuity vs. Annuity Due
Annuities can be divided into two types based on the exact time when the payments occur in a given period. The payments could either occur at the beginning of every period or the payments could occur at the end of every period. For instance when you take a house on rent, the rent is usually […]
Pension Fund Governance Structure and its Need
Since pension funds manage assets worth billions or even trillions of dollars. This means that it is crucial to create a structure that manages the pension fund itself. Since the pension fund industry is highly regulated, it is important for the fund to have a structure in place which allows for quick and effective decision-making. […]
Artificial Intelligence in Commercial Bank Lending
We have already seen the various ways in which technology has shaped the commercial banking domain. However, the commercial banking domain is so vast that it is being concurrently affected by many big changes. The increasing use of artificial intelligence for commercial lending is another important trend that is impacting the commercial bank lending industry. […]
Why Do Start-ups Fail After Receiving Funding?
It is common knowledge in the investing world that almost 90% of the start-up companies which come into existence shut down within the first couple of years. However, it is also assumed that if a company is able to gain funding from professional investors, its chances of surviving become astronomically high. This is because it […]
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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