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Simple English definitions for legal terms
quick-asset ratio
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A quick definition of quick-asset ratio:
The quick-asset ratio is a way to measure how easily a company can pay off its debts. It looks at how much money a company has in assets that can be quickly turned into cash, like cash on hand or accounts receivable, and compares it to the amount of money it owes in the short term. This helps investors and creditors understand how financially stable a company is and whether it can meet its financial obligations.
A more thorough explanation:
The quick-asset ratio is a financial ratio that measures a company's ability to pay off its current liabilities using its most liquid assets. It is also known as the quick ratio or acid-test ratio.
The formula for calculating the quick-asset ratio is:
Quick-Asset Ratio = (Current Assets - Inventory) / Current Liabilities
Let's say a company has $100,000 in current assets, $20,000 of which is inventory, and $50,000 in current liabilities. The quick-asset ratio would be:
Quick-Asset Ratio = ($100,000 - $20,000) / $50,000 = 1.6
This means that the company has $1.60 in liquid assets to cover each dollar of current liabilities.
Another example would be a company that has $50,000 in cash and $30,000 in accounts receivable, but $20,000 in inventory and $10,000 in prepaid expenses. Its current liabilities are $40,000. The quick-asset ratio would be:
Quick-Asset Ratio = ($50,000 + $30,000 - $20,000) / $40,000 = 1.25
This means that the company has $1.25 in liquid assets to cover each dollar of current liabilities.
These examples illustrate how the quick-asset ratio measures a company's ability to pay off its current liabilities using its most liquid assets, excluding inventory and prepaid expenses.