This tutorial covers everything there is to know about Quick Ratio, including its meaning, formulas, calculations, and interpretations. You will also learn how to calculate Quick Ratio in Excel using the Colgate Case Study.
You can download the Colgate Quick Ratio template from this link – https://www.wallstreetmojo.com/ratio-analysis-template/
What is a Quick Ratio?
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The quick ratio, also known as the acid test ratio, measures a company’s ability to repay short-term debts using its most liquid assets. It is calculated by adding the company’s total cash and equivalents, accounts receivable, and marketable investments and then dividing it by its total current liabilities.
Formula
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Quick ratio Formula = Quick assets / Quick Liabilities
= (Cash and Cash Equivalents + Accounts receivables) / (Current liabilities – Bank overdraft)
Interpretation of Quick Ratio
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– A quick ratio greater than 1 indicates that the company has sufficient quick assets to cover its current liabilities.
– A company with a quick ratio of 1 means that its quick assets are equal to its current assets.
– A low quick ratio indicates that the firm’s liquidity position is poor.
– However, the 1: 1 rule should not be followed blindly. For example, a company in an industry with a short operating cycle does not generally require a high quick ratio.
Links to Ratio Analysis Tutorials
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– Part 1 – Ratio Analysis – https://www.youtube.com/watch?v=yPUb6PsVvLA&list=PLazLoBfxFADN9Qq8j8hghG9nvVBXl1V0y
– Part 2 – Vertical Analysis – https://www.youtube.com/watch?v=7CX4F2Adubs&list=PLazLoBfxFADN9Qq8j8hghG9nvVBXl1V0y&index=2
– Part 3 – Horizontal Analysis – https://www.youtube.com/watch?v=4iOpN1zI0ag&list=PLazLoBfxFADN9Qq8j8hghG9nvVBXl1V0y&index=3
– Part 4 – Trend Analysis – https://www.youtube.com/watch?v=VLHrsLp0Jj8&list=PLazLoBfxFADN9Qq8j8hghG9nvVBXl1V0y&index=4
– Part 5 – Current Ratio – https://www.youtube.com/watch?v=rTGzy4vNRmg&list=PLazLoBfxFADN9Qq8j8hghG9nvVBXl1V0y&index=5
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