Investment, Coding and Actuary

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Ratio Rattles: Current Ratio and Quick Ratio

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Let’s look at two very easy ratios to detect the short term liquidity of the company: Current Ratio and Quick Ratio.

Current Ratio = Current Assets / Current Liabilities

As a general rule of thumb from The Morley Fool:

As a general rule, a current ratio of 1.5 or greater can meet near-term operating needs sufficiently. A higher current ratio can suggest that a company is hoarding assets instead of using them to grow the business — not the worst thing in the world, but it’s something that could affect long-term returns.

The information should be used again its competitors.

Since companies can manipulate and often bloat the inventory book value, I can use a second ratio:

Quick Ratio = (Current Assets – Inventories) / Current Liabilities

Most people look for a quick ratio greater than 1.0 to be sure there is enough cash on hand to pay bills and keep going.

Let’s have a quick look at two online retail giants: Amazon and eBay

2008 2009 2010 2011 2012
eBay Current Ratio 1.7 2.3 2.4 1.9 2.0
Quick Ratio 1.7 2.3 2.4 1.9 2.0
Amazon Current Ratio 1.3 1.3 1.3 1.2 1.1
Quick Ratio 1.0 1.0 1.0 0.8 0.8

According to the general rule of thumb, a current ratio greater than 1.5 is a good sign and current ratio greater than 1 is good. Looks like Amazon is less liquidable than eBay and is worst than the general comfortable line.

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Author: jam3sch3n

An actuarial student with a keen interest in investment and coding.

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