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Quick Ratio Formula | How to Calculate Quick Ratio? (Example) - YouTube
Channel: WallStreetMojo
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hello everyone hi welcome to the channel
of WallStreetmojo watch the video
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till the end and if you are new to this
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clicking the bell icon friends today we have going to learn a concept that's a quick ratio
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formula now quick ratio by the name
itself is liquid basically liquid ratio
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formula no there are two kind of ratios
current ratio and quick ratio current
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ratio accounts for at least the
liabilities or the assets which are
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going to get materialized within the
time span of but what about the
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quick liquidity so when we talk about
quick liquidity we talk about quick
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ratio but the quick ratio formula has a
following your formula as it is quite
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stated over here it is your cash highly
liquid the short-term marketable
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securities again high liquid and account
receivables so if you calculate for
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current ratio you have all the current
assets but over here some of the current
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assets like stock has been removed
because stock cannot get converted into
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liquid into a liquid form in a very
quick fashion
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so cash short term market securities and
account receivable divided by current
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liabilities so as you can see no change
in the liabilities ready let's try and learn how
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quick ratio works see the quick ratio
formula which is also known as the acid
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test ratio and it is one of the most
important liquidity ratio for
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determining the company's ability to pay
off
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it's current liability in a very short
known so basically it goes by the
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formula of the quick ratio where that
quick ratio means what we just discussed
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it is your cash plus any short term
marketable securities
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plus you have to add that is your debtors
that is your accounts receivable divided
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by your current liabilities now instead
of this you can also calculate your
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quick ratio something like this
your quick ratio is equal to now in case
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if cut if company in case company is not
given giving the breakup of the quick
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assets and then in that particular
scenario you can calculate your quick
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ratio something like this the total
current assets
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you need to deduct something from this
that is called the inventory and you
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need to add because that is prepaid
expenses so once you add once you do
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this or incorporate things in the
formula you have your car your quick
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ratio so divided by your current
liabilities over here you are just
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deducting your total current assets of
that inventory and prepaid expenses are
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not the liquid ones so you are deducting
that and the rest is going to be the
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stated things which is right in front of
us quick ratio example let's take an
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example on the same and understand let's
say there's a company called master
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company and it has following details
something like this they have the
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current assets and the detail of current
assets is cash which is $2,00,000
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then you have your advances okay you're
at once let's say is $30,000
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and there are some marketable
securities which is $60,000
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now we have some more details
that is your accounts receivable which
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is known as your debtors its value is
let's say $40,000 and
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inventories or you can say your stock is
$80,000 so this are some
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of the details for current assets now
your total current assets is going to be
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how much it is equal to sum of all this
value
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that is your 4 lakh 10000 is your total
current assets now let's talk about
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something that is current liabilities
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in case of Current Liabilities let's
what have some things over here the
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Accounts Payable which is also known as
your creditors let's say it is 2 lakhs
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$60,000 the accrual expenses
and this amounts to let's say $30,000
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there is other another
item involved over here is let's say
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shot them dead shot him dead
so which accounts to $90,000 and
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interest payable which is let's say
sixty thousand dollars now our total
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current liability will be which is four
lakh forty thousand and over here four
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lakh 10000 right the previous year acid
test ratio I'm talking about the
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previous year as a test ratio was let's
say one point four and the industry
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average
the industry average is let's say 1.7 so
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the calculation of the acid test ratio
will be something like this your acid
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test ratio is equal to all the things
that we mentioned gas cash plus
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short-term marketable securities plus
any accounts receivers and you will
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divide this by current liabilities so
let's try and put this in numbers and
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get the answer we have cash that is a
Dulac
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plus our marketable security 16,000 and
accounts receivable as 40,000 so this is
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your quick ratio formula is equal to
this is the total assets and you need to
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divide this by your total liabilities
and your final quick ratio is going to
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be 3 lakh divided by 4 lakh forty
thousand that's
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0.68 so what we see is that the previous
year's quick ratio was 1.4 but now it
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has reduced down to 0.68 but which is
not good too so let's understand how to
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interpret this ratio so the quick ratio
formula is like more stringent measure
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of the short-term liquidity remember
this thing now as as compared to the
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current ratio now the quick assets are
the ones which can be converted into
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cash in a short-term or you can say in a
period of 90 days okay the important
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difference between the current ratio
current ratio formula and in the quick
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ratio or acid test ratio formula is that
we are excluding that is something that
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is inventories over here and any prepaid
expenses so because as a part of the
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current assets in the quick ratio
formula so inventory is excluded because
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it is assumed that the stock you can say
that the stock is held by the company
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may not be realized immediately so the
inventory could be in the form of any
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sort of like the raw material
work-in-progress or you can say the
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finished goods and so on and so forth
so such a situation will make the
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process of the liquidating the inventory
all all the more tricky and
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time-consuming so an asset test ratio is
considered as good if it is one or more
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so you can see greater than one is
better so this is a benchmark that the
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company can pay off of its its current
liabilities with the help of the quick
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assets and without needing to sell off
its long-term assets and has a sound
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financial end care must be exercised in
placing too much reliance on the asset
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test ratio without further investigating
like you know there are things like
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seasonal business ok which seeks to
stabilize the production might have a
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weak quick ratio formula during its
period of slacks scenes but you can say
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higher
I mean higher one in case of in the peak
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business season so such a situation may
prove tricky to know the actual
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financial position of the company so
what is the use of the quick ratio so
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keeping the track of the quick ratio
formula it helps the management to
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determine whether they are maintaining
the optimum level off of the quick
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assets as so as to date the caterers to
take care of these short-term
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liabilities in the balance sheets second
quick ratio formula showcase of
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well-functioning
short-term financial cycle off of any
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coming and the third important is you
know this improves the credit
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credibility of the company with the
investor by gaining and maintaining the
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trust in the value of the investments
and also the creator's you can say of
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the company know their payments will be
made on time if you have learned and you
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