The immediate liquidity ratio is the total amount of a company's quick assets divided by the sum of its net liabilities and its reinsurance liabilities.. Fast assets include all liquid assets such as cash, short-term investments, equities, and corporate and government bonds that are approaching maturity.
Calculating this ratio provides insight into the amount of liquid assets that a company could tap in a short time, should liquidity be needed.
The quick ratio is also known as the acid test. This index measures a company's ability to meet its present obligations, hence its name “immediate”:
The short term is associated with this measure, which can be interpreted in two different ways:
The formula for calculating a company's quick ratio is:
Current assets (net of inventory and non-inventory) divided by current liabilities
However, The formula for the quick ratio itself already shows that it's not an indicator to be overly relied upon. In fact, if inventory is not excluded from the equation, it isn't a perfect indicator. By not discounting inventory, the ratio is presented as better than the company's actual ability to meet its short-term obligations.
The acid-test ratio assumes that a company will liquidate all of its current assets comprising the quick ratio to cover its short-term liabilities, something unrealistic as the company still requires a level of working capital to continue operating as a business.
The quick ratio is an important measure of a company's ability to cover its liabilities with relatively liquid assets. A company with a low quick liquidity ratio that encounters a sudden increase in liabilities may have to sell long-term assets or borrow money to cover its obligations.
It should be taken into account that, when proceeding with the calculation of this index, the result obtained must be expressed as a percentage. Depending on the type of company and its obligations, ratios higher than 20 or 30 %may be considered good, although, without forgetting that, always, For security, it is advisable to supplement this calculation with the liquidity ratio and solvency ratio, which really offer a more complete perspective of the company and its financial health..
