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Whenever the subject of startup funding is mentioned, the audience automatically assumes that equity investments are being discussed. This is because it is the big equity deals that are mentioned in the newspapers which catch the attention of the world. However, equity funding is not the only way in which startup founders can raise capital. […]
Volatility in Money Markets
In the previous articles, we have learned about how the money market is just like any other financial market. This means that just like other markets, speculators also form a significant portion of investors in the money market. As a result, the money market also has a certain amount of volatility just like other markets. […]
4 Main Objectives of Sponsorships
In the previous few articles, we have already seen that sports sponsorships have been witnessing a significant rise in the recent past. We know that corporations have been shelling out billions of dollars in order to be able to sponsor prestigious sports occasions. This sharp rise in budgets is because corporations now view the sponsorship […]
Introduction to Liquidity Ratios
Liquidity can be defined as the ability of a firm to make good its short term obligations. Most businesses function on credit. Hence to run a business firms have to both extend credit as well as ensure that they receive credit as well. Liquidity ratios measure the relationship between the amounts of short term capital […]
Hedge Funds and Regulations
Technically, the term hedge fund does not exist. In fact, the term hedge fund applies to any fund which is sold to accredited private investors and does not have to follow through with the regulation process! Now, investment advisory is a highly regulated industry and there are several laws which have been passed to ensure […]
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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