The Quick Ratio
The current ratio measures whether a company has sufficient short-term assets to cover its short-term liabilities. However, some current assets are not readily convertible into cash, and thus may not be available to cover the liabilities. Prepaid expenses is one such example. Another is inventory, which must first be sold (at an uncertain recovery price) and even then may simply become an account receivable.
Therefore, another liquidity ratio compares current liabilities only to those assets that can be readily turned into cash:
Quick ratio = (Cash + Short-term investments + Accounts receivable)/Current liabilities.
For Plantronics:
| Cash | 68,703 |
| Short-term investments | 8,029 |
| Accounts receivable | 118,008 |
| Quick assets | 194,740 |
| Current liabilities | 126,929 |
| Quick ratio: | 1.5x |
This shows that Plantronics is more than able to cover its near-term liabilities from readily accessable assets.
For more information, see all articles on: Financial Statement Analysis, Fundamental Analysis, Investing in Stocks, Ratio Analysis, Security Selection See also:
The Intelligent Investor: The Classic Text on Value Investing
Financial Statement Analysis: A Practitioner's Guide, 3rd Edition
Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)
