Quick Ratio Analysis Examples
Although the equation for the quick ratio may be the same for all types of business, the number it produces may be good or bad, depending on many variables. These various differences include the size of the company, the amount and type of inventory, and the field and customer base of the business. Each type aims at a different number, although everyone wants to know they have at least enough liquid assets to cover any liabilities.
If a business is small, it may not have many liquid assets. However, it probably has fewer employees to recompense, buildings to maintain, and vendors to pay. This allows a small company to have a good ratio while not acquiring many liquid assets. For example, a small company’s cash equals $897, its accounts receivable is $1172, and its short-term investments are $1219. The company’s liabilities equal $3013. The quick ratio would then equal $3288 divided by $3013. The resulting ratio is 1.09, and the company knows it is quite financially secure.
Large businesses with large products, such as computers or appliances, often don’t move their inventory very quickly. Because of this, they often want a higher quick ratio. As their inventory is hard to move, especially without a discount, they want to know their liabilities will be covered. A large company may have $100,000,000 in assets, but $50,000,000 of that is in inventory. However, their liabilities only equal $25,000,000. This gives them an extremely comfortable quick ratio of 2.0. With this number, they know that whatever disaster might strike, they will stay afloat.
High Turnover Inventory Business
A business with high turnover may appear to have less liquid assets in comparison to the accounts payable and other bills. However, if the inventory turnover is much faster than the monthly settling of accounts, cash is often available when needed, even if it doesn’t appear so on the quick ratio. Perhaps at a certain time a company’s assets amount to $800,000, and $500,000 must be subtracted for inventory. However, the current liability is $350,000. The quick ratio equals 0.86, but the inventory will make up for this as it is sold quickly.
In-Depth Analysis Example
An example of current assets of a company would be $80,000 in land and building, $800,000 in machinery, $10,000 in cash, $30,000 in the bank, $1,280,000 in stocks, $25,000 in short-term investments, $36,000 in less provision, $10,000 in bills receivable, and $9,000 in prepaid insurance. The liabilities might include equity share capital at $2,000,000, general reserve at $90,000, sundry creditors at $60,000, bills payable at $20,000, bank overdraft at $30,000, proposed dividend at $15,000, outstanding salaries at $5,000, and long-term loans at $60,000. This equals a comfortable 1.0 quick ratio.
Assets and liabilities may take many different forms, and compiling all the numbers may be an arduous task. However, once all of the numbers are input into the equation, the only difficultly left is deciphering whether the company is where it needs to be financially. For different businesses, this can take different forms, but all have the common need of being financially secure.