A quick assets ratio is classified as a financial liquidity ratio with the purpose of determining if a business is able to cover its short-term financial liabilities. It is used as an alternative to the current ratio, which assumes the business would be able to liquidate its inventory in the case of an emergency. Also known as an acid test, the quick assets ratio is calculated by taking the business’s current assets minus inventory and prepaid expenses, and then dividing this number by its current liabilities. Numbers used to calculate this equation can be found on the business's balance sheet. The quick assets ratio is used internally to monitor performance or externally by investors to monitor risk.
Quick assets ratio is often used in conjunction with the current ratio to determine a business's ability to meet its short-term obligations in the case of an emergency. The current ratio is calculated by dividing its current assets by its current liabilities. This ratio assumes that the business would be able to liquidate its inventory to finance short-term debt. This assumption can prove risky for investors, so they often use the quick assets ratio to have a better understanding of the business’s financial position to cover its debt.
Calculating the quick ratio is done by subtracting inventory and prepaid expenses from current assets, then dividing that number by its current liabilities. Removing inventory and prepaid expenses from its current assets will show a better assessment of the business’s ability to cover its short term liabilities in the case it is unable to liquidate its inventory. Current assets include cash, accounts receivable and notes receivable. Current liabilities are any debt that is payable within a year. Prepaid expenses include any debt that has already been paid, since it is no longer an obligation and cannot be converted into cash if needed.
Numbers used for calculating the quick assets ratio can be found on the company’s financial statements, specifically its balance sheet. Publicly traded corporations are required to make this information openly available, and it can often be found on the company’s Web site. A higher ratio does not always mean a particular organization is less risky. In general, a ratio over 1:1 is considered good but is best analyzed by comparing it against other organizations within its industry as well as seeing how it has changed over time for the specific organization.
Uses of the quick assets ratio include monitoring the business internally by decision makers or externally by investors. Decision makers within the organization must keep watch of its quick ratio to make sure it keeps enough current assets on hand to cover its short term liabilities. The quick ratio is commonly used as a benchmark against historical calculations to see how it fluctuates over time. If the ratio gets smaller over time this could be a sign that the company is not managing its cash properly or is taking on too much short-term debt. Outside investors use the quick assets ratio to assist in determining if an organization is too risky for investment, since a low ratio could mean that the investor might end up losing money if the business is unable to pay its obligations.
