Quick Ratio = (Current Assets – Inventories) / Current Liabilities
- Provides you with an indication of a company’s short-term liquidity. Measures a company’s ability to meet its short-term obligations with its most liquid assets. The higher the quick ratio, the better the position of the company to meet its short-term obligations.
Current Ratio = Current Assets / Current Liabilities
- If this ratio is under 1, then the company has some serious problems.
- Short-term liabilities (debt and payables) versus short-term assets (cash, inventory, receivables). Higher the ratio, the better…all else being equal.
One good source for researching and evaluating ratios like those above is http://moneycentral.msn.com. For a good example of what I’m talking about in this post take a look at Gilead Sciences, Inc.
One last thing to consider…The economy has been living on relatively low interest rates for the last 10 years it seems. What happens when we move to historically average interest rate levels? How does this impact future growth projects? How does this impact the commercial side and the consumer side of the economy? If you can accurately forecast the answers to those questions, you’ll be ahead of the market.