A quick asset refers to any asset that can be quickly converted into cash without a significant loss in value. Common examples include cash itself, marketable securities, and accounts receivables. These assets are essential for assessing the liquidity of a business, as they represent resources that can swiftly be utilized to meet short-term obligations.
Components of Quick Asset
Cash
Cash is the most liquid asset, readily available for use in transactions and debt settlements. It includes physical currency and cash equivalents such as checks and balances in bank accounts.
Marketable Securities
Marketable securities are financial instruments that can be easily sold on public exchanges. These include:
- Stocks: Shares of ownership in a company.
- Bonds: Debt instruments issued by corporations or governments.
- Treasury Bills: Short-term government securities with maturities ranging from a few days to one year.
Accounts Receivables
Accounts receivables represent amounts owed to a business by its customers from sales made on credit. These receivables are expected to be converted into cash within a short period, typically less than a year.
Importance in Financial Analysis
Liquidity Measurement
Quick assets are integral to liquidity ratios such as the Quick Ratio (or Acid-Test Ratio), which measures a company’s ability to cover short-term liabilities using its most liquid assets. The formula for the quick ratio is:
A higher quick ratio indicates better financial health and more robust liquidity.
Risk Management
Companies rely on quick assets for managing financial risks. Adequate levels of quick assets ensure that a business can meet unforeseen expenses without resorting to selling long-term investments or taking on additional debt.
Historical Context
The concept of quick assets has been central to financial analysis for decades. Early emphasis was placed on the liquidity of a company to safeguard against market volatility and economic downturns. As financial markets evolved, so did the tools and metrics for evaluating liquidity, with quick assets remaining a cornerstone of these evaluations.
Practical Examples
Example 1: Retail Company
A retail company holds the following quick assets:
- Cash: $50,000
- Marketable Securities: $30,000
- Accounts Receivables: $20,000
Total quick assets amount to $100,000. If the company’s current liabilities are $80,000, the quick ratio would be:
This indicates that the company has $1.25 in quick assets for every dollar of current liabilities.
Example 2: Tech Startup
A tech startup may have:
- Cash: $15,000
- Marketable Securities: $10,000
- Accounts Receivables: $25,000
Total quick assets are $50,000. With current liabilities of $40,000, the quick ratio is:
Related Terms
- Current Assets: Includes all assets expected to be converted to cash within a year, not limited to quick assets.
- Liquidity Ratio: General term for ratios analyzing a company’s ability to cover short-term obligations.
- Working Capital: Difference between current assets and current liabilities.
FAQs
What distinguishes quick assets from current assets?
Why are marketable securities considered quick assets?
Is inventory a quick asset?
References
- Peirson, G., Brown, R., Easton, S., Howard, P., & Pinder, S. (2015). Business Finance. McGraw-Hill Education.
- Brealey, R. A., Myers, S. C., & Allen, F. (2017). Principles of Corporate Finance. McGraw-Hill Education.
- International Financial Reporting Standards (IFRS).
Summary
Quick assets are essential components of financial liquidity, involving cash, marketable securities, and accounts receivables. They are vital in financial analysis for measuring a company’s ability to meet short-term liabilities and manage financial risks. Understanding quick assets helps stakeholders make informed decisions about a company’s financial health and operational efficiency.
