Candlestick Trading Blog
February 23, 2010
Quick Ratio
| One measure of the financial stability of a company is its ability to immediately retire current debt if necessary. The quick ration and the acid test are two similar calculations mean to determine if a company can immediately deal with debt. The difference is that the acid test typically does not include accounts receivable. Both calculations include cash and cash equivalents, marketable stocks and bonds, and current liabilities. The quick ratio, acid test, and a test measuring if a company can pay debts within a year, the current ratio, are used in fundamental analysis. These are considered basic stock information. . In understanding the stock market a knowledge of the measures of company strength and the ability to use these calculations to compare other wise similar stocks is important in picking stocks. The quick ratio has cash and cash equivalent, marketable securities and accounts receivable as it numerator and current liabilities as its denominator. The higher the ratio, the greater the company’s liquidity will be. A ratio of 1 to 1 is desirable. A strict definition of the acid test only takes into account cash and marketable securities in the numerator and uses current liabilities in the denominator. As we can see it leaves out accounts receivable as an asset in the equation. A third ratio is the current ratio which is simply current assets over current liabilities. This is considered the company’s ability to pay off current debts within a year. The ability to pay off debts as well as a low price to earnings ratio are important in value stock investing. These ratios are somewhat static measures compared to cash flow ratios. Cash flow ratio is the ratio of cash market cap divided by operating cash flow. Theory has it that the lower cash flow ratios are the more successful companies will be. Stock market analysis may look at these various ratios differently at different times. For example, a company is considered healthier with a quick ration, acid test, or current ratio above one as this information implies that the company will not get caught short due to production problems, difficulty getting a product on line, etc. However, a ratio of two, three, or higher implies that the company is not paying enough in stock dividends or is otherwise not using its profits effectively. The quick ratio and its cousins may be especially important when looking at penny stocks investing or small cap stock investing. Small companies, especially start up companies often do not have bank credit and fail if they cannot pay current liabilities. No matter how promising a product line or how impressive a business plan is a company that runs out of cash typically fails unless it can sell stock to raise capital. Types of large cap stocks that can get buy perfectly well with a low quick ratio, thank you, are large restaurant and grocery chains that move their inventory through very rapidly. In these cases inventory commonly turns over before accounts payable come due so the company comfortably stays ahead of debt even with a lower ratio. Knowing how to do stock analysis using a quick ratio is useful in any number of investing strategies as it tells investors and traders how to pick stocks that are financially healthy. Online Stock Market Reviews presented live via the internet by Stephen Bigalow |
|
 |
|
 |
|
 |
|
 |
------------------------------------------------------------------- -
0 Comments:
Post a Comment
<< Blog Home