Important Updates for Investors
Carla Pasternak's Premiere Issue of High-Yield International Just
Released
Income expert Carla Pasternak's debut issue of High-Yield
International covers a Taiwanese manufacturer yielding 9.5%... a
rare Mexican monopoly yielding 13.4%... and other top-performing
investments yielding up to 19.0%.
Government's Biofuel Timetable Could Spell +15,900% Growth
+15,900% growth might seem far-fetched... but it's not. In fact, it
is mandated by law. And I've identified the ONLY stock positioned to
capture this growth.
The
Silver Lining to a Falling Dollar
Despite the U.S. national debt, there is a silver lining for income
investors. This massive spending, combined with movement out of U.S.
Treasuries, is going to take its toll on the dollar, and
international income investors could reap the rewards in the form of
higher dividends. |
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| Acid Test Ratio |
What It Is:
The quick ratio is a measure of how well a company can meet its
short-term financial liabilities. Also known as the quick ratio, it
can be calculated as follows:
|
Cash + Marketable
Securities + Accounts Receivable |
|
Current
Liabilities |
A common alternative formula is:
|
Current assets –
Inventory |
|
Current
Liabilities |
How It Works/Example:
The quick ratio is a more conservative version of another well-known
liquidity metric -- the current ratio. Although the two are similar, the quick
ratio provides a more rigorous assessment of a company's ability to pay its
current liabilities. It does this by eliminating all but the most liquid of
current assets from consideration. Inventory is the most notable exclusion,
because it is not as rapidly convertible to cash and is often sold on credit.
Some analysts include inventory in the ratio, though, if it is more liquid than
certain receivables.
To demonstrate, let's assume this
information was pulled from the balance sheet of our theoretical firm -- Company
XYZ:
| Cash |
$60,000 |
|
Accounts
Payable |
$30,000 |
| Marketable
Securities |
$10,000 |
|
Accrued
Expenses |
$20,000 |
| Accounts
Receivable |
$40,000 |
|
Notes
Payable |
$5,000 |
| Inventory |
$50,000 |
|
Current
Portion of Long-Term Debt |
$10,000 |
| Total
Current Assets |
$160,000 |
|
Total
Current Liabilities |
$65,000 |
Using the primary quick ratio formula
and the information above, we can calculate Company XYZ's quick ratio as
follows:
|
$60,000 + $10,000
+ $40,000 |
=
1.7 |
|
$65,000 |
This means that for every dollar of
Company XYZ's current liabilities, the firm has $1.70 of very liquid assets to
cover those immediate obligations.
Why It Matters:
Obviously, it is vital that a company have enough cash on hand to meet
accounts payable, interest expenses, and other bills when they become due. The
higher the ratio, the more financially secure a company is in the short term. A
common rule of thumb is that companies with a quick ratio of greater than 1.0
are sufficiently able to meet their short-term liabilities.
In general, low or decreasing quick
ratios generally suggest that a company is over-leveraged, struggling to
maintain or grow sales, paying bills too quickly, or collecting receivables too
slowly. On the other hand, a high or increasing quick ratio generally indicates
that a company is experiencing solid top-line growth, quickly converting
receivables into cash, and easily able to cover its financial obligations. Such
companies often have faster inventory turnover and cash conversion cycles.
Like most other measures, quick ratio
does have its potential drawbacks. To begin, analysts commonly point out that it
provides no information about the level and timing of cash flows, which are what
really determine a company's ability to pay liabilities when due. The quick
ratio also assumes that accounts receivable are readily available for
collection, which may not be the case for many companies. Finally, the formula
assumes that a company would liquidate its current assets to pay current
liabilities, which is not always realistic, considering some level of working
capital is needed to maintain operations.
It is also important to understand that
the timing of asset purchases, payment and collection policies, allowances for
bad debt, and even capital-raising efforts can all impact the calculation and
can result in different quick ratios for similar companies. Capital needs that
vary from industry to industry can also have an effect on quick ratios. For
these reasons, liquidity comparisons are generally most meaningful among
companies within the same industry.
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Who Cares What the Market is Doing When You're Pulling in $28,900 a
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