Day 1 of Fundamental Investing
Today we'll start building knowledge in order to become a fundamental investor.
First, we'll be starting with Liquidity Ratios. Ratios that determine a businesses ability to be able to handle cash crunches and sail through some tough market cycles in the short term.
So ready?
The first ratio is called the Quick Ratio/Acid Test Ratio.
What is it?
The quick ratio or acid test ratio is a liquidity ratio that measures the ability of a company to pay its current liabilities when they come due with only quick assets. Quick assets are current assets that can be converted to cash within 90 days or in the short term. Cash, cash equivalents, short-term investments or marketable securities, and current accounts receivable are considered quick assets.
How to calculate it?
Here's an image for the same:
What's its significance?
-Higher quick ratios are more favourable for companies because it shows there are more quick assets than current liabilities. A company with a quick ratio of 1 indicates that quick assets equal current assets. This also shows that the company could pay off its current liabilities without selling any long-term assets. An acid ratio of 2 shows that the company has twice as many quick assets as current liabilities.
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