Liquidity Assets and Quick Ratio: Analytical Tools Every Trader Must Know

For those trading CFDs or monitoring a company’s financial status, understanding short-term liquidity indicators is essential for risk management. This article explains the importance of quick ratio and how to use it to make smart trading decisions.

Quick Ratio: A Deep Dive into Its Meaning

Quick Ratio is not just a number on a financial statement but a snapshot of a company’s immediate financial readiness. It measures whether a company can meet its short-term obligations within a year using only highly liquid assets.

Unlike the general current ratio that includes inventory, the quick ratio focuses solely on assets that can be converted to cash in the short term, namely: cash, cash equivalents, marketable securities, and accounts receivable.

Why exclude inventory? Because inventory often cannot be quickly converted into cash, especially in normal market conditions. For retail or manufacturing companies, inventory may be stuck for a long time before sale.

Components: What Makes the Quick Ratio Work

Cash

This is the most liquid asset—funds in checking or savings accounts that the company can access immediately to cover emergency expenses, such as paying creditors or daily operational costs.

Cash Equivalents

Includes short-term investments with maturities less than 3 months, such as treasury bills, money market funds, or short-term deposit certificates. These assets are low in volatility and easily convertible to cash when needed.

Accounts Receivable

Money owed by customers. Although not cash yet, it is in the process of being converted to cash normally. The challenge is collection time, and sometimes customers do not pay in full.

Current Liabilities

Obligations due within one year, including trade payables, short-term debt portions, accrued wages, taxes payable, and short-term loans.

Advantages of Using the Quick Ratio in Trading

🎯 Clear Risk Indicator

When markets are volatile, traders need to know how financially stable a company is. A high quick ratio ( greater than 1) indicates the company has more than 1 baht of liquid assets for every 1 baht of current liabilities. This is a positive sign that the company is unlikely to face short-term financial problems.

🎯 Tracking Actual Cash Flow

The quick ratio is not just a number game; it reflects whether the company can actually pay its bills. Experienced traders understand that cash flow is the real measure, while recorded profits may not be in the form of actual cash.

🎯 Comparing Companies

With the same quick ratio standard, traders can fairly compare companies within the same industry. A company with a quick ratio of 1.5 is more liquid than one with 0.8 in the same sector.

Disadvantages and Limitations

⚠️ Incomplete Picture for Some Industries

For retail or manufacturing sectors heavily reliant on inventory, ignoring inventory can underestimate liquidity. A company might have high inventory value but a low quick ratio, potentially misleading traders into poor decisions.

⚠️ Does Not Indicate Asset Efficiency

A quick ratio of 2.0 might look good, but if the company holds cash idle without investing, it’s a missed opportunity for shareholders.

⚠️ Varies by Industry

Banks often have higher quick ratios than tech companies due to the nature of their business. Traders should compare within the same industry, not across different sectors.

How to Calculate the Quick Ratio: Step-by-Step

Basic Formula

Quick Ratio = (Liquid Assets) / (Current Liabilities)

Where liquid assets = cash + cash equivalents + marketable securities + accounts receivable

Real-World Calculation Example

Consider XYZ Company, a retailer with the following financial data:

• Cash: 50,000 THB
• Cash Equivalents: 20,000 THB
• Accounts Receivable: 30,000 THB
• Current Liabilities: 60,000 THB

Step 1: Sum of liquid assets = 50,000 + 20,000 + 30,000 = 100,000 THB

Step 2: Divide by current liabilities = 60,000 THB

Step 3: Calculate ratio = 100,000 / 60,000 = 1.67

Interpretation of Results

A quick ratio of 1.67 indicates that XYZ has 1.67 baht of liquid assets for every 1 baht of current liabilities. This is a strong positive signal, suggesting the company is well-positioned to meet short-term obligations, giving traders confidence in its financial stability.

Conversely, if the quick ratio is 0.6, it means the company has only 0.6 baht of liquid assets per 1 baht of current liabilities, signaling potential liquidity issues. The company might need to sell inventory, borrow, or take other measures to cover obligations.

Using the Quick Ratio in CFD Trading Decisions

Identifying Financial Stability

When analyzing companies for CFD trading, look for a quick ratio between 1.0 and 2.0. Below 1.0 indicates higher risk; above 2.0 may suggest inefficient resource use.

Managing Risk per Contract

For traders planning to hold positions long-term, check the company’s quick ratio. A strong liquidity position reduces the risk of sudden financial distress during your holding period.

Responding to Financial News

If news indicates a decline in the company’s quick ratio, it could be a warning sign that stock prices might fall. Conversely, an increase in the ratio could signal a positive trend.

Difference Between Quick Assets and Quick Ratio

These terms are related but not identical:

Quick Assets refer to the assets themselves—cash, marketable securities, and receivables—ready to be converted into cash.

Quick Ratio is the calculation that compares these assets to current liabilities.

For example: A company with quick assets of 500,000 THB and current liabilities of 1,000,000 THB has a quick ratio of 0.5, which is considered low.

Application in Different Market Conditions

Stable Markets

A quick ratio of 1.2 to 1.5 is generally good, indicating sufficient liquidity.

Volatile Markets

During high volatility, look for quick ratios of 1.5 or higher, providing a better (margin of safety).

Recessionary Periods

In economic downturns, a quick ratio above 2.0 can provide reassurance, but be cautious that cash isn’t being hoarded without productive use.

Summary: Quick Ratio as a Tool, Not a Sole Answer

The Quick Ratio helps traders and investors identify short-term warning signals. It indicates whether a company has enough cash or near-cash assets to meet upcoming obligations.

However, do not rely solely on the quick ratio. Combine it with other indicators such as debt ratios, profit margins, cash flow trends, and historical performance to get a comprehensive view of the company’s financial health.

CFD trading involves risk, so utilize all available tools, including the quick ratio, to make informed decisions and manage risk wisely.