What is the rapid ratio?
One of the most reliable financial formulas used to assess the company's liquidity is a rapid calculation of the ratio, sometimes known as the ratio of acid test. In theory Executive managers, financial analysts, investors and creditors all relies on the formula as a standard accounting measurement. Fixed or continuous assets, including buildings, assets and equipment, are not included in the calculation of a quick ratio because they are not easily transformed into cash.
The calculation of the company's ratio includes the division of the total current assets of the total inventory according to the total obligations. The resulting number or fraction is a rapid ratio that is expressed as a total or fraction number. The resulting number of 1.0 or higher suggests that the liquidity of society is considered to be healthy. Fraction conditions usually indicate that the company has a certain risk of notes is able to pay its debts.
In the analysis of the financial risks of the organization, rapid analysis of the ratio is considered stricter than the analysis of working capital ratio because it is limited to cash and cash equivalents and does not take into account any stocks, fixed assets or equipment. Although a rapid ratio is a useful measure for determining the company's financial health, businesses with a high level of stocks such as retail stores or restaurants are somewhat disadvantaged in the analysis when they show significantly higher risk in their solvency profile. Financial analysts usually recommend caution in investing in companies that have a rapid ratio that is lower than the employment, because it means that assets are primarily tied in an inventory that can be difficult to dispose of in emergency.
People who are able to lend money to companies use a quick ratio to evaluate whether the company could repay its debts in EXtrem rush and under the worst conditions. It is also worth noting that the difference in perception of the rapid ratio is based on roles. While creditors might prefer to see a cash ratio to liability greater than 1.0, as it suggests that the company would be more likely to pay off a loan if it demanded urgency, the company's shareholders could prefer to receive less than 1.0 responsibility.