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Quick Liquidity Ratio Definition
Quick liquidity ratio is the total amount of a company’s quick assets divided by the sum of its net liabilities.
Quick assets are liquid assets such as cash, short-term investments, equities, and corporate and government bonds nearing maturity.
The quick liquidity ratio shows the amount of liquid assets a company can tap into on short notice.
A Little More on What is the Quick Liquidity Ratio
The quick liquidity ratio, also known as the “acid-test ratio”, is a liquidity ratio that further refines the current ratio by measuring the most liquid current assets available to cover current liabilities.
The quick ratio is more conservative than the current ratio because it excludes inventory and other current assets, which generally are more difficult to turn into cash. A higher quick ratio means a more liquid current position.
A company with a low quick liquidity ratio that finds itself with a sudden increase in liabilities may have to sell off long-term assets or borrow money in order to cover its liabilities.
For example, imagine if an insurer that has covered a lot of property and then there is a hurricane. That insurer is now going to have to find more money than it would normally anticipate to pay claims. If such an insurer has high quick liquidity ratio, they will be in a better position to make payments than an insurer with a lower ratio.
Quick liquidity ratios are expressed as a percentage. The range of percentages considered “good” depends on the nature of the company and its business model.
References for Quick Liquidity Ratio
Academic Research on Quick Liquidity Ratio
The Impact of Liquidity Through Quick Ratio on Share Price: Evidence From Jordanian Banks, Warrad, L. (2014). European Journal of Accounting Auditing and Finance Research, 2(8), 9-14. This a study is performed to determine if liquidity through quick ratio has significant effects on the share prices of publicly listed banks in Jordan. It evaluates financial reports of 14 banks listed in the Amman Stock Exchange from 2005 to 2011. The results of the study indicate that there is a significant impact of quick ratio on the share price.
STUDY OF RELATIONSHIP BETWEEN LIQUIDITY RISK (QUICK RATIO) AND INTERNAL AND EXTERNAL FACTORS IN NIKE COMPANY. pdf, FANG, J. (2018). This paper uses specific factors and the influence of macroeconomic variables on liquidity risk to investigate the performance of NIKE Company using data from annual reports from 2013 to 2017. It uses descriptive analysis methods to measure performance. The results indicate that the internal risk and economic environment can influence this performance.
Current ratio and quick ratio (acid) tests. Yoder, E. (2008). Radiology management, 30(4), 59. This article explains the differences between current and acid ratios which revolve around the current assets inventory, some deferred income taxes, and prepaid expenses. It also explains the meaning of quick ratio which is a liquidity ratio that determines if a company can settle its current liabilities with quick assets. It defines the current ratio as a liquidity ratio as the ability of an organization to meet its short term liabilities.
Impacts of liquidity ratios on profitability, Saleem, Q., & Rehman, R. U. (2011). Interdisciplinary Journal of Research in Business, 1(7), 95-98. This research attempts to reveal the existing relationship between liquidity and profitability that has to be maintained by each company during its routine operations. The results of the study stipulate that every ratio significantly affects the financial position of companies by different values along with the liquidity ratios.
Does liquidity impact on profitability, Zygmunt, J. (2013, March). In Conference of informatics and management sciences, March (pp. 38-49). This paper identifies the liquidity impacts on the profitability of listed Polish IT companies. The paper dictates the research expectations and then verifies the empirical hypothesis. The results produced are used to form a conclusion on the existence of the liquidity impact of the profitability of these Polish firms.
Measuring small business liquidity: An alternative to current and quick ratios, Skomp, S. E., & Edwards, D. E. (1978). Measuring small business liquidity: Journal of Small Business Management (pre-1986), 16(000002), 22. This paper proposes liquidity ratios that are not subjected to restrictive assumptions regarding their application and utilizes an axiomatic description of the liquidity policy of a firm to get an indication of the probability that the firm will exhaust its liquid reserves. It presents ratios that are an alternative to quick and current ratios. Such ratios include the cash ratio and the cash conversion cycle.
Impact of liquidity and solvency on profitability chemical sector of Pakistan, Khidmat, W., & Rehman, M. (2014). Economics management innovation, 6(3), 34-67. This study develops a model to increase the liquidity and profitability of companies in Pakistan using a sample of 10 chemical companies and their data for the last nine years. The study finds out that the solvency ratio significantly affects the return on assets and return on equity. It also deducts that, liquidity, solvency, and profitability are directly related meaning an increase in one leads to an increase in the other.
A nexus between liquidity & profitability: a study of trading companies in Sri Lanka, Alagathurai, A. (2013). This article investigates liquidity’s relationship to profitability to determine their nature and extent of connection in profit-driven listed trading companies in Sri Lanka. It analyzes the data obtained from annual reports and accounts of these companies. However, the results obtained here are only valid for this sector and cannot be generalized to non-quoted companies.
Financial ratio analysis for the small business, Patrone, F. L. (1981). Journal of Small Business Management (pre-1986), 19(000001), 35. This paper explains the importance of understanding the essential financial ratios to small business owners that investors and lenders will use when they evaluate these businesses. It also describes the different uses of these financial ratios such as indicating the profitability of a company. The paper then lists the most common ratios that are used by lenders and investors and the formulas for calculating them.
Income per bed as a determinant of hospital’s financial liquidity, Bem, A., Ucieklak-Jeż, P., & Prędkiewicz, P. (2014). Prob Manage 21st century Sci Soc, UAB, 2, 124-131. This study is used to determine the significant factors that impact the level of the liquidity ratio of a hospital. Taking into assumption the fact that the level of financial liquidity in hospitals is dependent on some factors like the number of beds and annual income per bed, this study presents four hypotheses.
Financial ratio analysis of firms: A tool for decision making, Babalola, Y. A., & Abiola, F. R. (2013. International journal of management sciences, 1(4), 132-137. This paper presents the primary relationship between financial analysis and accounting and the significant role of accounting in the work of analysts through the information it provides. It explains that financial analysis has the purpose of formulating a diagnosis that relates to the financial performance of a company or organization.