Definition
Quick assets refer to certain types of assets owned by a company, including cash and cash equivalents, marketable securities, and accounts receivable, which can be quickly converted into cash. These assets provide a measure of a company’s short-term liquidity, meaning its ability to cover its immediate liabilities without selling its long-term assets. The term “quick” is used because these assets can be swiftly turned into cash typically within 90 days.
Phonetic
The phonetics of the keyword “Quick Assets” is: kwɪk æsɛts.
Key Takeaways
Three Main Takeaways About Quick Assets:
- Definition: Quick assets are those assets which can be readily converted into cash within a period of 90 days. They include cash, marketable securities, and accounts receivable.
- Importance: The liquidity of a company is measured by its quick assets. They help in determining whether a company can pay off its short-term liabilities without selling its long-term assets. Hence, the higher the quick assets, the better the short-term financial position of the company.
- Usage: The Quick Ratio, also known as the Acid-Test Ratio, is computed using quick assets and current liabilities, and it gives a more conservative view of a company’s ability to meet its short-term liabilities compared to the current ratio. So, the quick assets are essential in defining the company’s liquidity ratios.
Importance
Quick assets are important in business finance as they are a reliable indicator of a company’s short-term liquidity and financial health. They include cash, marketable securities, and current receivables that can be quickly converted into cash in the event of a financial crisis, usually within 90 days. The preferred quick assets to current liabilities ratio is 1:1, demonstrating that the company has enough assets to cover its immediate liabilities. Understanding the value of a company’s quick assets allows lenders, investors, and analysts to determine the company’s ability to meet its short-term financial obligations without needing to liquidate longer-term assets or take on additional debt. Thus, quick assets play a crucial role in financial risk assessment.
Explanation
Quick Assets serve a crucial purpose in financial analysis as they help understand a business’s liquidity position in a stringent manner. They are so named because they can quickly be converted into cash—usually within 90 days without losing their value considerably. The primary purpose of calculating quick assets is to evaluate the short-term liquidity of a company, that is, its ability to meet short-term obligations without relying on the sale of inventory, which might not always be feasible or timely. This is why inventory is excluded from quick assets.Determining and evaluating quick assets is particularly vital for analysts, investors, and creditors. Analysts use the ratio of quick assets to current liabilities, known as the quick ratio or acid-test ratio, to gauge the company’s short-term financial strength or liquidity risk. Investors scrutinize this figure while evaluating the financial health of the company, as a high quick ratio usually signifies financial robustness. Conversely, a low quick ratio might indicate potential problems in meeting short-term obligations that could lead to bankruptcy, particularly in periods of financial instability. Thus, a company’s quick assets can significantly influence its creditworthiness and overall financial perception in the market.
Examples
1. Cash and Cash Equivalents: This typically represents the most liquid form of quick assets a company has. It includes physical cash, bank deposits, and marketable securities such as Treasury bills and short-term government bonds. For instance, if a company named ABC Corp. has $500,000 in cash and cash equivalents, this counts as quick assets since they can be readily utilized to meet short-term financial obligations.2. Accounts Receivable: This represents the money owed to a business by its customers following the sale of goods or services on credit. An example of this could be a clothing retail company, XYZ Retail Inc., which has extended credit to its bulk customers, amounting to $200,000 as receivables. This is considered a quick asset as it can be converted into cash within a short span of time (usually within 90 days).3. Short-Term Investments: These are investments that a company plans on holding for a year or less. They include assets like equity or debt securities, bonds, or certificates of deposit. For example, a tech company, TechPro Inc., might have short-term investments in corporate bonds worth $1,000,000. These are regarded as quick assets since they can be sold and converted into cash in less than one year.
Frequently Asked Questions(FAQ)
What are Quick Assets?
Quick Assets are a category of assets owned by a company that can be converted into cash quickly. They typically include cash and cash equivalents, marketable securities, and accounts receivable.
Why are Quick Assets important in business?
Quick Assets are crucial as they indicate a company’s short-term liquidity position. They showcase the ability of a company to pay off its current liabilities without the need to sell off its long-term assets.
How are Quick Assets different from Current Assets?
While both Quick Assets and Current Assets are assets that can be liquidated to meet short-term obligations, Quick Assets only include assets that can be converted to cash within 90 days or in the short-term without a significant loss in value. Current Assets, on the other hand, also include inventory and other assets that may not be quickly converted to cash.
How to calculate Quick Asset ratio?
The Quick Asset ratio, also known as the Acid-Test ratio, is calculated by dividing quick assets (cash and cash equivalents, marketable securities, and accounts receivable) by current liabilities.
What does a high Quick Asset ratio represent?
A high Quick Asset ratio indicates that a company can meet its short-term obligations with a greater margin of safety, indicating better financial health.
How often should a company calculate its Quick Assets?
Ideally, a company should calculate its Quick Assets as part of its regular financial analysis, often quarterly or annually, depending on the company’s reporting practices.
Are all Quick Assets tangible?
No, not all Quick Assets are tangible. While cash is a tangible quick asset, cash equivalents like marketable securities and accounts receivables are considered intangible, but they can still be quickly converted into cash.
Can inventory be considered as a Quick Asset?
Typically, inventory is not considered a Quick Asset because it cannot be converted into cash as quickly as cash equivalents, marketable securities, or receivables. It depends on the nature of the business and the market conditions.
Related Finance Terms
- Current Assets
- Liquidity Ratios
- Current Liabilities
- Quick Ratio / Acid-Test Ratio
- Accounts Receivable
Sources for More Information
