Before trading CFDs, you need to know what the Quick Ratio is and how to calculate it easily.

In the world of finance and investment, assessing a company’s ability to pay short-term debts is an important aspect that should not be overlooked. Quick Ratio is a financial indicator used to measure a company’s short-term liquidity, helping traders, creditors, and investors understand whether the company has enough assets to meet its financial obligations in the near future.

What is the Quick Ratio? Why is it important?

Quick Ratio (Current Ratio) is a way to measure whether a company has sufficient liquid assets to cover its current liabilities. The key difference from other indicators is that the Quick Ratio does not include inventory, because inventory may take longer to convert into cash.

Why is it important for CFD traders? A company with a high Quick Ratio (more than 1) indicates a stable financial position, meaning a lower risk of default. Conversely, a low Quick Ratio (less than 1) may signal potential liquidity problems ahead.

What is included in the Quick Ratio calculation?

Quick Ratio is a formula composed of highly liquid assets, divided into 4 main parts:

1. Cash and cash equivalents

Cash held in current accounts and savings accounts are the most liquid assets. The company can use these funds to settle obligations immediately. Cash equivalents such as treasury bills and money market funds are also included in this category.

2. Marketable securities

Stocks, bonds, and other securities that can be easily sold in the market without negatively impacting their price. These assets can be converted into cash quickly if needed.

3. Accounts receivable

Money owed by customers. Although not cash directly, once collected, receivables can be converted into cash relatively quickly.

4. Current liabilities (denominator)

Obligations expected to be paid within one year, such as trade payables, short-term debt, and accrued expenses.

How to easily calculate the Quick Ratio

To calculate Quick Ratio, use the following formula:

Quick Ratio = ( (Cash + Cash Equivalents + Accounts Receivable) ) ÷ Current Liabilities

Let’s use a real example. Suppose Company A has the following data:

• Cash: 50,000 THB
• Cash equivalents: 20,000 THB
• Accounts receivable: 30,000 THB
• Current liabilities: 60,000 THB

Calculation: Quick Ratio = (50,000 + 20,000 + 30,000) ÷ 60,000 = 100,000 ÷ 60,000 = 1.67

This means Company A has 1.67 units of liquid assets for every 1 unit of current liabilities. This situation indicates a relatively strong position, capable of covering short-term expenses without selling inventory.

Quick Ratio vs. Quick Assets: What’s the difference?

The terms “Quick Assets” and “Quick Ratio” are often confused, but they are different:

Quick Assets (Liquid Assets) = Actual assets that the company has (as numerator)

• Includes cash, securities, and receivables.

Quick Ratio (Current Ratio) = The relationship between quick assets and liabilities (ratio)

• Used to assess the company’s liquidity position.

To evaluate a company’s liquidity status, you should look at the Quick Ratio, not just Quick Assets.

How to interpret the Quick Ratio correctly

( Quick Ratio greater than 1 Indicates the company has more liquid assets than short-term liabilities. A good sign that the company can meet its obligations comfortably without relying on inventory sales or additional borrowing.

) Quick Ratio equal to 1 The company’s liquid assets are exactly equal to its short-term liabilities. This is a neutral situation—neither good nor bad.

Quick Ratio less than 1

Signals potential liquidity issues. The company may need external funding or to sell assets to meet obligations. This warning could pose a risk for traders.

Advantages of the Quick Ratio for CFD traders

✅ Accurate assessment of short-term liquidity

Since the Quick Ratio excludes inventory, which may be difficult to sell quickly, it provides a more precise view of the company’s ability to pay debts. This indicator reflects the company’s true liquidity position.

✅ Risk management aid

For CFD traders with a short-term focus, knowing whether a company faces liquidity problems is crucial. A high Quick Ratio suggests a lower chance of default.

✅ Suitable for trading in volatile markets

During economic uncertainty, companies with high Quick Ratios are better positioned to withstand crises.

✅ Easy to calculate and interpret

The formula is straightforward, using publicly available balance sheet data.

Limitations of the Quick Ratio to watch out for

❌ Limited perspective

Excluding inventory might give an incomplete picture for companies heavily reliant on inventory, such as retail.

❌ Industry differences

Different industries have different standard Quick Ratios. Comparing companies across sectors may not be appropriate.

❌ High Quick Ratio does not always mean good management

A high Quick Ratio could indicate that the company holds a large amount of unproductive assets.

Using the Quick Ratio in CFD trading

Risk management strategies

Traders should use the Quick Ratio alongside other analyses. Companies with a Quick Ratio above 1.5 are considered to have good liquidity, reducing the risk of sudden stock devaluation.

Stock selection indicator

In volatile markets, choose companies with sustainable Quick Ratios. They are more suitable for short-term trading than those with low ratios, which may face financial difficulties.

Comparing with competitors

Check the Quick Ratio of a company against its industry peers. A higher ratio may indicate a stronger position.

Summary for easy recall

Quick Ratio is an important measure of a company’s short-term liquidity, ideal for CFD traders who want to quickly assess a company’s financial health.

Key points to remember:

• Quick Ratio greater than 1 = good liquidity
• Quick Ratio less than 1 = potential problems
• Exclude inventory from calculation for a more accurate picture

For CFD traders, always consider the company’s Quick Ratio as part of fundamental analysis to improve decision-making chances.