Quick assets
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Quick assets are the most liquid assets being controlled by a company. They are cash or their value can be quickly exchanged into cash in a relatively short period of time (usually shorter than a year) without significant loss of their value or no loss whatsoever. This group of assets is essential for maintaining liquidity and solvency of a company.
For healthy operations most companies keep a proper amount of quick assets in form of cash, cash equivalents and marketable securities to maintain adequate cash flow and finance their immediate operations or investments[1].
Quick assets components
Quick assets are made up of:
- Cash - funds readily available in bank accounts and interest-bearing accounts, for example: paper money in register, checks, money deposits, cash in banks, etc.
Marketable securities - these are financial instruments that can be easily traded on open markets with quoted prices and there is a substantial amount of buyers ready to make a purchase, for instance: common or preferred stocks of another company.
- Accounts receivable - collectible only (uncollectible and stale receivables should not be included in quick assets), goods or services that have been provided to customers but have not yet been paid for.
Prepaid expenses and taxes - expenses for services being spent in current account period but not yet received, for example: insurance, rent expense.
- Short-term investments- that means investments which are expected to be converted into cash within a year. These are usually stocks or bonds which can be liquidated easily and quickly.
Qick assets calculated
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In a simpler and more comprehensible form:
So, to quickly calculate value of quick assets one needs just a value of current assets and inventory, which can be found in balance sheet of the company.
The reason for excluding inventory from quick assets is that it takes longer time to sell them and exchange them to cash - so they do not possess the essential quality that defines quick assets. Also, some industries that work on long-term contracts have long-term receivables but they are usually included in quick assets, though they should be excluded from calculation of quick asset value, due to their low liquidity.
Application in company evaluation - quick ratio
Main use of quick assets value is to determine the liquidity of the company in short term, that is to gauge the ability of the company to finance its immediate operations or pay its bills and short-term debt (liabilities) [2].
Quick ratio is a financial formula which divides the sum of quick assets by its current liabilities.
It is used to determine company's ability to pay its short-term liabilities and obligations in case of a sudden drop in revenue (for example because of a bad market situation). Investors and financial experts use this ratio to assess liquidity of a company in comparison to other enterprises in the same branch or to verify if a company maintains proper business operations [3].
The optimal value of quick ratio is considered to be 1, though it may vary between different branches, and it means that a company is capable of financing its current liabilities. What is more, comparing values of quick ratio over time may help investors track changes in company's performance. A value much bigger than 1 may imply that the company may not be making use of its resources in an effective way and value much lower than 1 may mean that the company is illiquid or may face liquidity problems in near term, which can lead to solvency issues (paying for long-term obligations)[4].
Alternative name for quick ratio
The other name for quick ratio is acid-test ratio. The name comes from an ancient chemical test being used to detect whether mined metal is gold or base metal. Gold is a noble metal and is resistant to corrosion and acids. If metal dissolves due to reaction with acid, it is not gold. Hence the name for detecting company's proper operations.
References
- Ang, A., (2013) Illiquid Asset Investing, Columbia Business School Research Paper, BlackRock, Inc 13(2)
- Costea, C. D. (2009) The liquidity ratios and their significance in the financial equilibrium of the firms, The Annals of The "Ştefan cel Mare" University Suceava. Fascicle of The Faculty of Economics and Public Administration, Volume 9, No.1(9),
- Michalski, G., (2014) Factoring and the Firm Value, Facta Universitatis Series: Economics and Organization, 5(1) p. 31-38
- Noor, A., & Lodhi, S., (2015) Impact of Liquidity Ratio on Profitability: An Empirical Study of Automobile Sector in Karachi,; International Journal of Scientific and Research Publications, 5(11)
- Yu, Q., Miche, Y., Séverin, E., & Lendasse, A. (2014). Bankruptcy prediction using extreme learning machine and financial expertise. Neurocomputing, 128, 296-302.
Footnotes
Author: Klaudia Trybuła
