Financial Analysis

Super Quick or Absolute Liquid Ratio

Super Quick or Absolute Liquid Ratio

Super Quick or Absolute Liquid Ratio assets means account cash in hand, cash at bank, and marketable securities or temporary investments. The almost all favorable value of this ratio greater than one, i.e., 1:2.

Obviously, the adequacy of the 50% worth absolute liquid assets to pay the 100% worth current liabilities in time.

It means absolute quick assets worth one half of the worth of current liabilities are sufficient for satisfactory liquid position of a business.

Probably, this ratio isn’t as popular because the previous two ratios discussed.

It shows the correlation between absolute liquid or super quick current assets and liabilities.

Absolute quick assets include cash, bank balances, and marketable securities.

If the ratio is comparatively less than one, it represents the company’s day-to-day cash management in a very poor light.

If the ratio is considerably more than one, the absolute liquid ratio represents enough funds within the type of cash in order to fulfill its short-term obligations in time.

Advantage of Super Quick Ratio or Absolute Liquid Ratio         

  • The regular benchmark ratio of Super Quick Ratio is 0.5:1.
  • It ensures most liquidity of the business organization.
  • Provides a simple cash to pay its current liabilities.
  • It measures a company’s liquidity.
  • This ratio is more accurate liquid than quick and current ratio.
  • Represents the standing position of the corporate .
  • Indicates the potential of strong and want not to borrow from others.

Disadvantage of Super Quick Ratio or Absolute Liquid Ratio

  • It’s limited to cash, bank balances, and marketable securities.
  • Giving much importance on only cash and marketable securities.

Formula of Super Quick Ratio or Absolute Liquid Ratio:

Absolute liquid ratio = Absolute liquid assets / Current liabilities

Where absolute liquid assets = Cash + Bank + marketable securities.

Read|Current Ratio

Interpretation Super Quick Ratio or Absolute Liquid Ratio

The most favorable and optimum value for this ratio should be one, i.e., 1: 2.It indicates the adequacy of the fifty percent (50%) worth absolute quick assets to pay the 100% worth current liabilities in time

Probably, this ratio is not as popular as the previous two ratios discussed.

It shows the correlation between absolute liquid or super quick current assets and liabilities. Absolute quick assets include cash, bank balances, and marketable securities.

Example

The current assets and the current liabilities of a trading company are seems like:

Current assets:

  • Cash and Bank: $5,000
  • Marketable securities: $18,000
  • Accounts receivables, net: $8,000
  • Inventories: $10,000
  • Prepaid expenses: $500

Current liabilities:

  • Accounts Payable: $15,000
  • Accrued payable: $5,000
  • Notes Payable: $8,000

Required: Compute current ratio, quick ratio and absolute liquid ratio from the above data.

Solution

(1). Current ratio:

Current assets/Current liabilities

= $41,500 / $28,000

= 1.48

or

1.48 : 1

(2). Liquid ratio:

Liquid assets/Current liabilities

= $31,000* / $28,000

= 1.1

or

=1.1  :  1

(3). Absolute liquid ratio:

Absolute liquid assets/Current liabilities

= $23,000** / $28,000

= 0.82

or

0.82 : 1

*Liquid assets: $5,000 + $18,000 + $8,000 = $31,000
**Absolute liquid assets: $5,000 + $18,000  = $23,000

The absolute liquid ratio eliminates the accounts receivables from the list of quick assets so there could also be some doubt about their quick collection.

Therefore, this ratio is beneficial only if used with current ratio and quick ratio is helpful. An absolute liquid ratio of 0.5:1 is taken into account ideal for many of the enterprises.

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