What Are the Best Tips for Quick Ratio Analysis?

Osmand Vitez
Osmand Vitez
Businessman with a briefcase
Businessman with a briefcase

Quick ratio analysis is a mathematical tool companies uses to assess their liquidity. The most common formula here is to divide current assets less inventory by current liabilities. Quick ratio results determine the ability of a company to pay off short-term liabilities with short-term assets. The best tips for quick ratio analysis include using accurate and properly prepared accounting data, setting a reference point, and benchmarking the quick ratio against another figure. Simply calculating the quick ratio on its own without purpose can result in poor data with little use.

All financial ratios make use of a company’s standard financial statements, prepared using basic accounting principles. Poorly prepared data can result in quick ratio analysis that is misleading and inaccurate. For example, an erroneous entry that overstates cash can result in a better-looking quick ratio. While the company thinks its ability to repay loans is quite well off, the truth is that the data is skewed. Following all standard accounting standards when preparing financial statements can ensure the company produces the most accurate ratios possible.

Ratios need a reference point. The result from quick ratio analysis is a single figure, such as 0.79 or 1.20, among other similar figures based on the current input. A quick ratio result less than one indicates a company may have difficulty paying its sort-term liabilities. A company must then set a reference point as a goal for its quick ratio. For example, a company with a poor quick ratio result may set a higher figure as the starting goal in order to improve its financial viability.

Another best tip for quick ratio analysis is to use the ratio as a benchmark for measuring success. Companies can do this one of two ways, that is, using prior historical data or a leading industry competitor. Historical data makes use of previous business data to determine if the company is better or worse off as of the current period. For example, a company may have a quick ratio of 0.68 in a previous year. After implementing changes to the business operations, the quick ratio may change to 0.87, a significant improvement as the company attempts to reach its 1:1 quick ratio goal.

The company can also use quick ratio analysis to compare itself to a leading competitor. This allows the business to determine it if is better than other companies in the industry. Having ratio results worse than competitor's is a sign of inefficiency. If this is the case, a company will often restructure its operations in order to meet the industry standard for the quick ratio.

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      Businessman with a briefcase