What Are Quick Assets?
Quick assets are those owned by a company which can easily be converted into cash without significant loss. These assets include cash and its equivalents, marketable securities, and accounts receivable. Their high liquidity makes quick assets crucial for calculating financial ratios like the quick ratio, used extensively in analyzing a company’s liquidity and decision-making.
Key Takeaways
- Analysts use current and quick assets to assess a company’s liquidity from the balance sheet.
- Quick assets comprise cash and equivalents, marketable securities, and accounts receivable.
- They provide a conservative measure of liquidity, excluding inventories.
- The quick ratio measures a company’s immediate liquidity, assessing the ability to cover current liabilities without relying on inventory or financing.
Basics of Quick Assets
Quick assets are valued for their convertibility into cash within a short timeframe without substantial loss. Primary components include cash, marketable securities, and accounts receivable—factors that make them significant for a company’s liquidity. Inventories are excluded as they take longer to convert into cash.
Companies often maintain a buffer of cash and marketable securities to meet short-term operational needs. Companies facing liquidity challenges may use credit lines to supplement quick assets. The nature of a company’s liabilities will influence its ratio of quick assets, which varies significantly between industries like retail and B2B services.
The Quick Ratio: A Tangible Example
The quick ratio formula illustrates how analysts utilize quick assets to measure a company’s ability to meet immediate financial obligations. The quick ratio is computed as:
🔼 Quick Ratio = (Cash and Equivalents + Marketable Securities + Accounts Receivable) / Current Liabilities
**Alternative Calculation: **Quick Ratio = (Current Assets - Inventory - Prepaid Expenses) / Current Liabilities
This ratio provides investors insight into whether a business can sustain operations if revenue collections slow or stop.
Quick Assets Versus Current Assets
Quick assets offer a more stringent view of liquidity compared to current assets, excluding harder-to-sell inventories or other liquid assets. The primary advantage is its focus on the most liquid assets for immediate liability coverage. It is more stringent than the current ratio, which includes inventories. This more refined assessment helps analysts gain a clearer picture of an entity’s financial health without relying on inventory liquidation.
Decipher the term ‘quick’ originating from Old English ‘cwic,’ meaning “alive” or “alert,” as quick assets indeed keep a company’s liquidity alive and alert.
Related Terms: Current Assets, Current Ratio, Liquidity Ratios.
