# What is the quick ratio? Meaning, how to calculate?

The quick ratio is a standard measure that is no longer strange to the worldeconomic activities, financial investments and business activities. However, many people still have questions What is the quick ratio? and what these numbers mean in financial matters.

To help people better understand this concept, let's refer to the following article to find a complete answer.

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## What is the quick ratio?

Quick ratio (instant payout ratio) is a unit of measure to accurately quantify the potential for quick settlement of short-term liabilities, operating by way of converting current assets into cash without loss of inventory, thereby reflecting on the financial capacity of the enterprise.

Quick ratio is also known as quick ratio, quick ratio, instant ratio, acid test ratio.

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## Formula for calculating quick ratio

The formula to calculate the quick ratio is to use:

Liquidity ratio = (current asset value – inventory value)/current liabilities.

The quick ratio is a much more demanding factor than the current ratio. Therefore, it can help to eliminate the inventory element thanks to its low liquidity.

## The properties of quick payout ratio

Quick ratio is considered to be relatively strict when compared with current ratio. This coefficient unit is calculated using the formula of current assets divided by total current liabilities. In the formula for calculating quick ratio, the inventory factor has been completely excluded. Therefore, this formula is very popular among financial investors.

The reason that inventory is not an appropriate factor to include in the quick ratio formula. Because of the ability to convert to cash easily, the same goes for prepaid expenses.

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## The meaning of quick ratio

When I understood What is the quick ratio?. One would infer that the quick ratio is the measure by which the short-term financial condition of a business can be read. In other words, this coefficient is a unit that represents the healthy potential of any business.

The higher the quick ratio, the greater the debt payment capacity and vice versa. How good is the quick payout ratio?. In fact, this coefficient will be in the following two ranges of values.

### Quick payment ability > 1

When the coefficient is greater than or equal to 1, it shows that the enterprise's ability to immediately pay short-term debts is at a high level. In this situation, most businesses do not have problems paying short-term debts.

### Quick payment ability < 1

On the contrary, when the quick ratio is less than 1, it means that the ability to pay all short-term debts in a short time is impossible. Or to be more precise, businesses will have problems in paying short-term debts quickly.

In a financial statement, when the quick ratio is obtained, the value is many times smaller than the current ratio. This shows that current assets are highly dependent on inventory. Such cases are often accompanied by very low liquidity of short-term assets.

With a ratio less than 1, an inevitable consequence is that the business will go bankrupt because there are many ways to raise capital for debt repayment. On the other hand, when the quick ratio is too high, too much cash will lead to low working capital turnover, leading to a decrease in capital efficiency.

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## Note about quick payout ratio

### No expression of ability to pay other than cash

The quick ratio does not show the non-cash solvency of the business to pay for short-term loans. That is, not considering the case that the business will use a quantity of goods that are in high demand in the market, which can be sold immediately or exported.

Because of this, it is not practical when the amount of money is not much, the short-term investments of the business do not exist. But the amount of finished goods in stock has an immediate supply value that can lead to the conclusion that the business is unable to pay its short-term debts.

Many short-term debts may be large, but not yet due, and businesses are forced to pay them immediately. While many long-term and other liabilities exist, past due payments are not taken into account.

### Combine payout coefficients together for reasonable results

It is necessary to know how to combine the payout coefficients together if you want to use a reasonable quick ratio. Furthermore, it is necessary to compare quick ratios in different years to identify trends in market volatility.

## Some concepts related to quick ratio

### Short-term payment ratio

Short-term ratio is also known as short-term debt solvency ratio, current ratio, and current ratio. This is a ratio that shows how much each short-term debt value will be offset by the value of current assets.

Therefore, the short-term ratio is an indicator that most generally reflects the ability of assets to convert into cash to pay short-term debts for the business.

### Loan interest payment ratio

Interest payment ratio is used to analyze the ability of a business to pay its debts. The higher the loan interest payment ratio, the more positive signs the business has shown, and the better the ability to repay the loan. On the contrary, the case of this ratio is low, it shows that the debt payment ability of the enterprise is low.

### Cash payout ratio

This ratio is used to more closely assess the payment situation of the enterprise.

Calculation formula:

Current Ratio = (Cash + Cash Equivalents) / Current Liabilities

In which, cash and cash equivalents include standard cash, cash, bank deposits, other short-term investments, and short-term securities investments, if available, that can be easily converted into cash. within 3 months without any major risk.

## Conclusion

Here is the information to explain the question "What is the quick ratio?” and the significance of this coefficient. Hope this article will be a useful reference for readers.

Information edited by: banktop.vn