Question

How to analyse a company by this ratio? Or what can these ratios tell us?

Quick Ratio

	2017	2016	2015
Quick Ratio	1.77	1.95	2.28

Answer 1

Step 1:

Understand Quick ratio:

Quick ratio = Quick assets / Quick liabilities

Quick ratio = (Current assets - inventory – prepaid expenses)/Current liabilities

Quick ratio = (Cash and cash equivalents + marketable securities + Debtors) / Current liabilities

The formula above for quick ratio is written in three different way, it is just expansion of its previous one.

The quick ratio indicates short term financial liquidity position of a firm or firm’s ability to meet is short term obligation through highly liquid assets. As firm has higher liquid assets it can easily pay off coming liabilities through effective working capital and cash management system

Firm’s liquidity position is measured through quick ratio hence its be adequate as per industry standards. Quick ratio standard differ industry to industry hence, a gross generalization cannot be done.

Hence, cash and equivalent are most liquid position a firm has and then we have marketable securities and then debtors.

As assets are on numerator of formula it means the higher ratio will signify the higher liquidity position. The current liability is in denominator hence lower the denominator will throw higher Quick ratio and higher current liabilities will throw lower quick ratio.

Higher the Quick ratio better the position.

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Step 2:

Now, lets analyze the firm’s Quick ratio:

2015 > 2.28

2016 > 1.95

2017 > 1.77

From 2015 to 2016 the Quick ratio fall down from 2.28 to 1.95 respectively and From 2016 to 2017 the Quick ratio fall from 1.95 to 1.77.

This fall is consistent for past two years hence, we can say the liquid assets for the firm is decreasing faster than the current liabilities.

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Step 3:

We can conclude that firm’s liquidity position is deteriorating because the Quick ratio is falling down.