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Quick Ratio interpretation

Quick Ratio is an indicator of company's short-term liquidity. It measures the ability to use its quick assets (cash and cash equivalents, marketable securities and accounts receivable) to pay its current liabilities. Quick ratio formula is:

Quick Ratio formula

Quick ratio specifies whether the assets that can be quickly converted into cash are sufficient to cover current liabilities.

Ideally, quick ratio should be 1:1.

If quick ratio is higher, company may keep too much cash on hand or have a problem collecting its accounts receivable. Higher quick ratio is needed when the company has difficulty borrowing on short-term notes. A quick ratio higher than 1:1 indicates that the business can meet its current financial obligations with the available quick funds on hand.

A quick ratio lower than 1:1 may indicate that the company relies too much on inventory or other assets to pay its short-term liabilities.

Many lenders are interested in this ratio because it does not include inventory, which may or may not be easily converted into cash.

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