Quick Ratio | Acid Test Ratio | Liquid Ratio
Quick ratio may be defined as the relationship between quick / liquid assets and current or liquid liabilities. Liquid assets means an asset is converted into cash very easily without any loss of value. The following formulae were used to calculate Quick Ratio.
Formula to find out Quick Ratio
Liquid Assets = Current Assets — Inventories — Prepaid Expenses
The term inventories includes stock of raw materials, work in progress and finished goods.
Liquid Liabilities = Current Liabilities — Bank Overdraft
Significance of Quick Ratio
As a rule of thumb, the standard quick ratio is 1:1. It means that the value of current assets should be equal to current liabilities. If so, the company can meet its short term obligations. Besides, the standard ratio of 1:1 can not be used blindly.
An analyst should be very careful while using quick ratio. The reason is that all the debtors cannot be realized immediately to meet its current obligations. Sometimes, a company maintains low quick ratio i.e. below 1:1 but the same company has good liquidity position if it has fast moving inventories.
Super Quick Ratio
It is otherwise called as Absolute Liquid Ratio or Cash Ratio or Cash Position Ratio. This ratio is calculated when liquidity is highly restricted in terms of cash and cash equivalents. The following formulae are used to calculate Super Quick Ratio.
Formulae to find out Super quick Ratio
Super Quick Assets = Cash in Hand + Cash at Bank + Easily Marketable Securities or Temporary Investments
Significance of Super Quick Ratio
The standard ratio of Super Quick Ratio is 0.5:1. It ensures most liquidity of the business concern. Hence, there is a need of giving much importance on only cash and marketable securities.