Use the Quick Ratio

Use the Quick
Ratio
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Investors use the quick ratio, also known as
the acid test, to determine if a company
has the ability, in the near term, to pay
back current debt.


Creditors also use the quick ratio in deciding
whether or not to extend loans to
companies.


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Both investors and traders use the quick
ratio in evaluating stocks and deciding if a
stock price is likely to rise or fall.


The quick ratio differs from the price to
earnings ratio in that it does not measure
current cash flow but rather cash, or cash
equivalents, in hand.


In this sense investors use the quick ratio as
a measure of a stock’s margin of safety.


A stock with a high quick ratio will be seen
as a secure investment whereas a stock
with a low quick ratio will be seen as risky.


The day trader may use the quick ratio in
picking stocks that might become volatile
due to debt problems.


If a company is currently unable to retire its
debt, it may subject to stock price volatility.


Following the stock with Candlestick
analysis will help the trader anticipate
price movement in response to this
situation.


Investors use the quick ratio as part of
fundamental analysis of stocks.


Although the fundamentals of a stock are
quickly discounted by the market, knowing
fundamentals gives the investor or trader
as clear idea of the likely limits of a
stockfs price.


In long term investing, intrinsic stock value is
thought by many to be the gold standard.


However, a company with great products
and services still needs to manage its
short term debt in order to survive.


Sadly, too many promising companies go
out of business or are taken over because
of short term debt issues.


The savvy trader will spot these stocks and
use technical analysis tools such as
Candlestick pattern formations in order to
profitably anticipate changes in price.


To use the quick ratio effectively one needs
to understand that what constitutes an
acceptable quick ratio varies among
market sectors.


In other words the investor or trader will
compare a stock’s quick ratio with other
stocks selling comparable products or
services and not with the market in
general.


A quick ratio of 1 or better tells us that a
company has cash and quickly convertible
assets sufficient to retire immediate debt.


It does not tell us about the company’s
credit worthiness.


For example, a company with substantial
debt free property and plant facilities as
well as a strong cash flow will typically be
able to borrow money to cover short term
needs even it does not have the cash on
hand.


We would typically not expect to see a great
deal of market volatility in such a stock
using Candlestick charting techniques.


In trading stocks or in options trading the
quick ratio is a useful guide to short term
credit worthiness.


Spotting stocks with questionable quick
ratios and analyzing with Candlestick
patterns can lead to profitable stock
trading.


For the long term investor finding stocks
with high quick ratios can be a first step to
finding valuable additions to a stock
portfolio.


Use the Quick Ratio

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Use the Quick Ratio