Quick ratio (Acid test ratio) is one of liquidity indicators, which informs us about how many times the firm would be able to pay its current liabilities, if it converts its short-term receivables and financial assets to cash.
This indicator deducts the least liquid component from the current assets - inventories, or possibly also long-term receivables. It is therefore very useful in industries, where high level of stock must be held.
Recommended value, interpretation and comparison
The recommended value is around 1. However, similarly with current liquidity ratio, it considerably depends on the industry.
Their general interpretation:
- lower values = lower ability to pay short-term obligations
- too high values = inefficiencies - it is recommended to evaluate them together with turnover ratios
- ideal values shall thus be neither low nor high
- with the recommended values
- however, some variations are possible by industry, type of company etc. - so it is very important to compare the indicators in time-series; it the company does not achieve the recommended values, but have done well without any problems, it can be then expected that it will continue to be successful with the same values in the future
- appropriate is the comparison is with the industry average or with similar companies in the industry
Possible reasons for higher liquidity (the reasons for the lower liquidity can be applied conversely)
- high receivable balances (only for current and quick liquidity ratios)
- high receivable recorded at the end of the year, which was not paid by the end of the year
- uncollectable debt increased
- higher maturity provided to customers, e.g. within acquisition or retention process
- receivables are overvalued, for example, e.g. no legitimate provisions to receivables were made
- low payable balances, e.g. due to effective supplier management. Adequacy of payables level an be evaluated by using indicator Days payable outstanding
- economic growth, during which is the liquidity lower because liabilities are growing faster than current assets (14)