What is the quick ratio?
The quick ratio, also referred to as the acid-test ratio, serves as a financial gauge utilized to evaluate a company's liquidity. It is calculated by dividing a company's current assets by its current liabilities, emphasizing the capability to fulfill short-term obligations with highly liquid assets.
How to calculate the quick ratio
The quick ratio determines a company's capacity to meet short-term liabilities by dividing its current assets by its current liabilities.
The significance of the quick ratio
This metric holds significance in assessing a company's liquidity, showcasing its ability to meet immediate obligations with highly liquid assets. A high quick ratio signals strong liquidity and prompt settlement of short-term obligations, while a low ratio implies potential struggles in meeting such obligations.
Example of a company with a high quick ratio
Coca-Cola serves as an example of a company with a high quick ratio (2.01), illustrating their abundant short-term assets covering liabilities. This indicates their ability to swiftly repay debts, reducing reliance on long-term assets, thus presenting stability to investors.
Example of a company with a low quick ratio
ExxonMobil Corporation (XOM) showcased a low quick ratio of 0.5 in 2017, implying limited cash and equivalents available to cover current liabilities, attributed partly to extensive long-term debts and narrower profit margins within its industry.
Example of a company with an abnormal quick ratio
An abnormal quick ratio, below 1.0, suggests a company's inability to cover short-term liabilities with short-term assets. Reasons behind such ratios might include extensive long-term liabilities, slow-moving inventory, or challenges in generating operational cash flow, possibly indicating financial distress.