Quick Ratio (Acid Test Ratio) - Explained in Hindi | #34 Master Investor - YouTube

We've seen in our previous video,

that if we want to know the short financial position of any company,

then we can calculate its current ratio.

Now if we want to be a bit more conservative,

we want to see those current assets

which we sell very soon and complete our current liability

so that is your quick ratio.

The quick ratio is a bit more conservative than the current ratio.

So in this video, we'll see what is the formula of quick ratio exactly?

how do you calculate that?

And when you are analyzing any company then how much should be the ideal ratio?

If the quick ratio is less than the ideal ratio then what is the meaning of that,

if it is more, then what is the meaning of that?

So you must watch this video till the end.

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Now see, in our previous video, we've seen the formula of current ratio,

the current ratio is current assets divided by current liabilities.

Now the current assets are those assets that you convert into cash in one year.

Now if we talk about quick ratio, then in the quick ratio, these current assets,

you'll replace them with quick assets.

So the formula of quick ratio will become quick assets divided by current liabilities.

So now see what are these quick assets?

We had talked about the current assets that these current assets get converted into the cash

within a year.

Now quick assets are such assets which in very short term

converts into cash.

Now the meaning of this very short term is they can convert into cash within 1-2 months.

That means the company will not face much problems,

if it has sufficient quick assets then it can completely pay its current liabilities in 1-2 months.

So the company will not face the problem of liquidity.

So which current assets we had seen

we've already talked that those assets that within one year either get consumed or converted into cash.

those are your current assets.

Under this which assets come? if we talk about the current assets,

one is your cash and deposits,

company has ready cash or some deposits in the bank, they can be converted into immediate cash.

Then your short term investments,

like if the company invested in mutual funds or shares.

So now see, cash and deposits come under the quick assets

because you can convert them into cash immediately.

you can also sell short term investments immediately means share or mutual funds

so they'll also come under the quick assets.

Then you've some account receivables,

assume you've given some money to the customer

means some accessories,

on loan, so that money also comes to you in one to two months.

So we'll take this also in the quick assets.

Then there can be some short term loans and advances,

then you can recall them, whatever loan you've given, its recovery can happen.

In 1-2 months or maximum in 3 months the recovery takes place.

So you can convert this also into quick assets.

Now see you have an inventory that maybe works in progress inventory, raw materials or

let's say some finished goods, then they don't have a guarantee that immediately goods will be sold or not.

so we do not consider it into the quick assets.

It is a current asset but not a quick asset.

Now other than this, there are some expenses which you've already paid,

now, which you've paid earlier, let's say you've paid the premium of insurance

or you've given an advance salary to some employees

or you've done the payment to the contractors in advance.

Then whatever you've paid in advance you would not recover that

so you do not take it into the quick assets.

So it's all about quick assets,

so we basically under the quick assets takes one, cash and deposits

short term investments,

and takes receivables and short-term advances.

Then comes the matter of current liabilities

so current liabilities, we've talked earlier also that such liabilities which you have to pay in the one year,

They are.

Under that comes, accounts payables,

basically, if you've taken some goods on loan then you've to give money to him.

Short-term loans which are of less than one year,

cash credit and overdraft are also for less than one year.

So that also comes in the current liabilities.

If you've taken some advance from your customer then it comes in the short-term liability.

Then there can be some outstanding expenses

like you haven't given the salaries of 2-3 months,

maybe your rent or your electricity or water bill,

if all these are pending then they come in the current liabilities.

So see, if we have to write the formula of quick ratio again,

then what will we include in the quick assets?

so you can write the quick ratio directly,

one, you take cash plus deposits,

plus you add the short-term investments in that,

plus receivables,

plus short-term loans and advances

and if you divide this total by the current liability then you get the quick ratio.

Now assume you don't have all this information

and you've current assets,

and if you get the current assets and inventory then you can directly minus the inventory from the current assets,

and you can divide this by the current liabilities

and ideally, you should minus the prepaid expenses also from this

which we had already seen that prepaid expenses do not include in the quick assets.

But practically, you don't get the prepaid expenses

when you see the balance sheet of any company,

then generally they got clubbed with the remaining current assets.

This is why, when we talk about the practical definition we directly write this,

that you minus the inventory from the current assets so you get the quick assets

and then you divide that by the current liabilities.

But whichever formula you are using, use that on a consistent basis

if you do a comparison with any other company then you have to use the same formula.

you just keep this in mind.

So now let's talk, once you've calculated the quick ratio

so how much should be the ideal ratio?

Assume if the quick ratio is less than one

then what does it mean?

If the quick ratio is less than one that means your quick assets are less than the current liabilities.

That means the company can get into trouble in the short term.

if any kind of liquidity problem comes,

let's say the company does not have the money even for expenses

and in the current liabilities

whatever the loans you have

let's say whoever has given you the loans or advance, start demanding for the money

or the demand for the goods,

then here the company has a liquidity crunch.

so this can be a short-term problem for the company.

We call this high liquidity risk.

So if high liquidity risk happen then the company has to

suddenly needs to generate extra funds or whatever are its long term funds

it has to take out the funds from there.

So this is why the quick ratio should not be less than one, ideally.

Or if it is there then the company should have sufficient long-term funds to fund that.

Then see if the quick ratio is more than one then what does it mean?

Ideally, we want a quick ratio of more than one, it is considered as an ideal quick ratio.

So the meaning of a quick ratio of more than one is

that your current liabilities can be met easily,

If whoever's liabilities are there if they start the demand

then the company has sufficient cash or cash equivalents

or it has such current assets that can be converted into cash in 1 or 2 months

and the company can easily meet its current liabilities.

If the quick ratio becomes higher than 2 or 2.5, then what is the meaning of that?

The first thing is the company is comfortable meeting its current liabilities,

but the quick ratio is just quite high

So what is the meaning of that? company has whichever the short-term funds

it is not utilizing them properly.

That means, either the money is lying idle in the bank in the form of cash

or maybe the money is lying in such investments from where the company is not getting sufficient returns.

Or this is possible that whichever is the account receivable, the company has to get money from the customer

It stays locked for many days.

So that means, the company is unable to use them efficiently.

So this is the meaning of the quick ratio.

So now see we've understood the concept of a quick ratio and how much should be the ideal ratio.

Now let's quickly see if you want to calculate this online for any company

then how do we do it?

So you see here, I've taken out the financials of Asian Paint from the website of money control.

You can get the financials of any company by going here in the search.

I've taken the example of Asian Paints

because in the current ratio also we had discussed this example only so let us continue this

We come down you see here on the left-hand side you get all the financials

In the balance sheet, you get current assets and current liabilities.

You will come down here

then you see here you are getting the current liabilities here

so your current liabilities are 3398.96

it's about March 2018.

After that, your total current assets are 5500

And what do we want? we want inventories also

so our inventory is 2178.43.

So if now we'll want to calculate the quick ratio

so we had seen the formula of quick ratio

current assets minus inventory

so current assets minus inventory

divided by current liabilities.

So how much are our current assets here?

5500.17

So 5500.17 you write here

minus, how much is your inventory?

2178.43.

2178.43, you'll write here.

you'll divide this total,

with whom? with current liabilities.

So you'll write the current liabilities 3398.96

When you'll calculate this value, this value will come out to be 0.98.

So see if you want then you can calculate the quick ratio manually in this way also.

But you do not need to calculate manually,

You can directly go here in the ratios, you easily get the ratio already calculated.

So we come here down, so you see here all the liquidity ratios are given here.

And I've seen it is directly given here 0.98.

So now see you can compare it for all the years

In the 5 years, in what way its quick ratio has gone up or down?

So see in the previous year it was 1.13, it was quite comfortable.

Now it is a bit down from one,

so it is comfortable, which means it is almost one.

Before that also, their quick ratio is fluctuating around 0.9.

So it is a bit aggressive

because if the company has even a little issue in the short-term then it may need to generate extra funds.

But yes, if it is 1 or near 1 then we can say that quick ratio is okay.

And second, you can compare it with the average of the industry also.

Let's say it is Berger Paints or

Nerolac

if you compare it with those companies also

and you see the quick ratios of the complete industry

and if its quick ratio is around this which means this company is running on the track.

And yes, if in this

the quick ratio gets very low, let's say it becomes 0.5,

that means it's a sign of worry.

That means the company can definitely get the problem in short term.

And for that, you should study these remaining ratios too,

because the complete story of the company we understand from all the ratios.

Now I'll one by one

already covered many of them,

I'll slowly cover all the ratios so you watch the upcoming videos also

So that's all in this video

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