Imagine a scenario where you invest all your money on a company, and suddenly it collapses. In an event like this can only refund you will have the resources you will get after liquidizing it. It is of course only if any money back to shareholders after the company is liquidized.
What can you do to avoid such a situation? You have to know whether the company plans to invest have enough cash and assets that you can get your money by the time of liquidation. Next comes the important question, is there any index, which shows the liquidity of the company?
Yes, 'Quick Ratio' is the indicator used to identify liquidity in any company. This ratio has been calculated by taking the sum of current assets and debtors, and then dividing it with short-term debt. This method specifically exclude such a statement.
Normally, a quick ratio of 1 or higher is healthy for a company, and it indicates that the company could not count on the sale of inventory to pay the bills. If quick ratio is below 1 means that the company is in trouble and presumably the new investors should keep away.
The formula for quick ratio is:
Quick ration = (Accounts Receivable cash Cash) / (Accruals Other Notes Payable)
There are also a few exceptions when it comes to the relationship quickly. As we understand it, quick ratio shows liquidity in the company. But there are cases where quick ratio not give you the correct picture. Imagine a company with no bills due today, but with a lot of bills to be paid tomorrow. If you calculate the speed ratio today, the figures will show, which has a good cash flow. But in reality it can not be considered to have a good cash flow because of the uncounted liabilities that are pending.
Zoran Maksimovic is an author focused on investing for beginners. To see more articles about fundamentals of investing visit his site Investing made easy.
Article Source: http://EzineArticles.com/?expert=Zoran_Maksimovic
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