Revenue Based Financing
The manner in which startup companies obtain their financing can have a very large impact on the future of their business. In the previous articles, we have already discussed how bootstrapping as well as investments by professional investors work. Both of these approaches have their own advantages and disadvantages. Up until recently, it was assumed […]
Advantages of Using Cryptocurrency
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Root Causes of Inadequate Cash Flow in the Retail Sector
In the previous articles, we have already seen how important cash flow is for the retail sector. We have also explained how the lack of adequate cash flow can be a cause of concern and even causes many retail businesses to shut down. However, the fact that retail businesses have cash flow issues is an […]
Working Capital to Sales Ratio – Meaning, Formula, Assumptions and Interpretation
Formula Working Capital to Sales Ratio = Working Capital / Sales Meaning Stating the working capital as an absolute figure makes little sense. Consider two companies, both having the same working capital of USD 100. While one company uses this working capital to generate sales of USD 500, the other uses the same amount as […]
Financial Modelling in Real Estate
Financial modeling has become an essential part of most real estate transactions today. This is because of the fact that real estate deals today are complex are undertaken not only by individuals but by corporations who specialize in such transactions. Take the case of Real Estate Investment Trusts (REITs), for example. These trusts are organizations […]
The quick ratio is a variation of the current ratio. However, a quick ratio is considered by many to be a more conservative estimate than the current ratio. This characteristic fetches it the nickname of being the “Acid test ratio”.
The difference between the current ratio and the quick ratio is the fact that quick ratio excludes the inventory. In theory this may seem like a small difference, however in practice anyone who is aware about the difficulties involved in liquidating inventories at the right price will vouch for the conservativeness of this ratio. The quick ratio has been discussed in greater detail in this article.
Quick Ratio = (Current Assets - Inventories) / Current Liabilities
The quick ratio checks the company’s performance to fulfill its obligations in a situation when it is not able to liquidate its inventory. In such a situation the company will have to pay its current liabilities out of the cash and cash equivalents that it has on hand and the amount of money it has already tied up in accounts receivables. The ideal quick ratio is considered to be 1:1. However, this varies widely according to the different credit cycles prevalent if different industries. Hence an analyst must look at competing firms and the industry average before forming opinions based on the current ratio.
There are no assumptions made regarding the inventory, because it is excluded from the calculation of this ratio. However, there are assumptions made about debtors and the fact that they will pay up on time to finance the payment of short term liabilities that a company has on hand.
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