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OklaBoston (68.16)

Current Ratio vs Quick Ratio

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August 15, 2011 – Comments (5)

A question for anyone who has an opinion on this subject:

Given two stocks, one with a Quick Ratio higher than it's Current Ratio and the other with the situation reversed, which would you be more likely to make an "Outperform" pick on? Assume that all ratios are higher than 1.0. 

I suspect that part of the reason my score here is so low is that I have spent more time studying technical analysis then fundamental analysis. This question is part of my attempt to correct that situation. 

5 Comments – Post Your Own

#1) On August 16, 2011 at 1:45 AM, truthisntstupid (94.09) wrote:

"Two hours ago"

That's what it said on the main blog page.  This Fool posted this two hours ago and nobody yet has tried to answer his question?

OK.  Look, OklaBoston, I'll try to help you.  The quick ratio is the ratio of total cash and assets considered to be liquid enough to be considered "cash equivalents" (say, short-term investments that can be quickly sold)  to current liabilities.  Essentially, if they had to pay all  their current bills tomorrow using only the cash and assets that could easily be quickly converted to cash, what percent of their bills would they be able to pay?

The current ratio, on the other hand, is the ratio of the firm's total  current assets to its current liabilities.  This ratio counts cash and cash equivalents as well as unsold inventory and accounts receivable, on the asset side of the ratio.  Since not all current assets are as liquid and as easily convertible to cash as 'cash and cash equivalents',  the current ratio will always be higher than the 'quick' ratio.

The quick ratio can never be higher than the current ratio, unless, I suppose, the company is fully broke (no cash) but still remains in possession of other assets.  In that case, it probably would no longer be listed and you wouldn't be looking at it.  If I'm wrong about it probably no longer being listed, I'm certainly not wrong about this:  You certainly shouldn't spend much time on any further evaluation of said company.

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#2) On August 16, 2011 at 1:51 AM, truthisntstupid (94.09) wrote:

Essentially, if they had to pay all their current bills tomorrow using only the cash and assets that could easily be quickly converted to cash, what percent of their bills would they be able to pay?

Tomorrow is an exaggeration.  I'm pretty sure without dragging out a book that 'cash equivalents' would include shot-term assets and accounts receivable that could reasonably be expected to be easily converted to cash in 30 days or less.

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#3) On August 16, 2011 at 1:52 AM, truthisntstupid (94.09) wrote:

shot-term assets

Short-term assets

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#4) On August 16, 2011 at 2:03 AM, truthisntstupid (94.09) wrote:

OklaBoston, if you're relying on technical analysis alone, I hope you aren't investing in individual companies.  You can't evaluate a company's financial strength, profitability, and competitive advantages based on technical charts.

 

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#5) On August 16, 2011 at 2:04 AM, blesto (31.64) wrote:

Truth is right. As to whether or not a deeper understanding will improve your CAPS score.... Well, I'm learning I need to collect my points when I can get them. Gaming the CAPS system is not my forte. I peaked around a score of 90 and as you can see now I'm <20. :-\ 

May I refer you to the  Foolsaurus for the Quick Ratio and Current Ratio.

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