Publications
Partners
Quick ratio – also known as the acid test – essentially expresses a company’s ability to repay short-term creditors out of its most liquid assets.
It’s the measure of the short-term solvency of a company calculated by adding all current liabilities.
The exclusion of inventory makes the quick ratio a more reliable measure of liquidity than the current ratio, which includes inventory.
The reason is that inventory isn’t always easy to convert into cash.
A snapshot
Should a company be called on to settle all its current liabilities it would need to ensure it has available to it current assets at least equal to the level of current liabilities.
Companies producing durable goods – furniture, white goods retailers and vehicle manufacturers – can’t rely on inventory levels when assessing their level of liquidity.
It’s not uncommon for companies to receive adverse audit opinions where current liabilities exceed current assets.
Though it’s unlikely all a company’s current liabilities would be called on for settlement at the same time, a perceived lack of liquidity can – and generally does – make creditors uneasy.
That can result in a call on all current liabilities to be settled at once.
This year’s table is very similar to those of previous years’, with the top rankings in terms of quick ratio populated by exploration groups, cash shells and investment/private equity companies.
By the very nature of such businesses they don’t hold on their balance sheets significant levels of current liabilities.
Liquidity
That doesn’t mean their balance sheets are necessarily stronger than others but merely from a short-term point of view their balance sheets are more liquid.
Investment companies traditionally don’t carry too many current liabilities and are usually asset heavy.
Cash shells usually only have cash as a meaningful entry in the balance sheet, while mining exploration companies are at some stage flush with the capital required to delineate new company reserves.
This year’s top quartet comprises all three categories.
First placed is Zambian Copper Investments, with a quick ratio of 315 times.
The group morphed into a cash shell following the disposal of its only core asset, a 28.4% shareholdings in a Zambian mining company.
In second place is the Rupert investment vehicle Reinet (83.5 times), followed by coal exploration group Keaton and financial services player New CorpCapital.
A typical feature shared by those groups is they “operate under the radar”.
Without much corporate activity to speak of – especially the usual wheeling and dealing that requires capital expenditure – they manage to avoid media attention.
Being super-solvent is hardly newsworthy.
Sectors sway
The rest of this year’s top 100 is dominated by the three mentioned sectors.
It’s difficult to find representatives of other industries here, but some noteworthy groups do stand out.
A regular good performer that features again is Nu-World, a leading provider of home appliances with a quick-ratio of 2.05 times.
Still, that’s significantly lower than its quick ratio of 3.59 times in 2009.
Two media peers also feature in the higher echelons, with Caxton (41th) and Moneyweb (53rd) sporting quick ratio covers of 2.72 and 2.26 respectively.
Retailer Lewis (2.66 times), Truworths (2.57 times) and Foschini (2.21 times) have also done well.
An important guide when assessing quick ratio readers should realise is the futility to make comparisons between groups operating in different sectors.
There’s no way a manufacturer that needs continued capital outlay to fund its basic infrastructure and further growth can compare with a cash shell that holds a balance sheet of cash and negligible liabilities.
However, an intra-sector comparison does make for fascinating reading.
For example, take the retail sector.
No cross-sector simile
While Woolworths, our 200th ranked company for this index, has a quick ratio of 0.95 times – which means it won’t be able to service all its creditors without having to liquidate some of its inventory.
Sector peer Foschini has a quick ratio of 2.21 times (56th placed).
Woolies’ shareholders and creditors will probably not be too much concerned about its quick ratio of less than one times, because a substantial portion of its business consist of trading in fast-moving consumer goods.
In the unlikely event Woolworths should clear stock to pay creditors it can bargain on selling its food inventory quite quickly at a market-related price.
However, it’s more difficult to force sell clothing and apparrel at market prices, which mean it’s quite prudent of Foschini to have its debt covered more than two times by non-inventory items.
- Finweek
It’s the measure of the short-term solvency of a company calculated by adding all current liabilities.
The exclusion of inventory makes the quick ratio a more reliable measure of liquidity than the current ratio, which includes inventory.
The reason is that inventory isn’t always easy to convert into cash.
A snapshot
Should a company be called on to settle all its current liabilities it would need to ensure it has available to it current assets at least equal to the level of current liabilities.
Companies producing durable goods – furniture, white goods retailers and vehicle manufacturers – can’t rely on inventory levels when assessing their level of liquidity.
It’s not uncommon for companies to receive adverse audit opinions where current liabilities exceed current assets.
Though it’s unlikely all a company’s current liabilities would be called on for settlement at the same time, a perceived lack of liquidity can – and generally does – make creditors uneasy.
That can result in a call on all current liabilities to be settled at once.
This year’s table is very similar to those of previous years’, with the top rankings in terms of quick ratio populated by exploration groups, cash shells and investment/private equity companies.
By the very nature of such businesses they don’t hold on their balance sheets significant levels of current liabilities.
Liquidity
That doesn’t mean their balance sheets are necessarily stronger than others but merely from a short-term point of view their balance sheets are more liquid.
Investment companies traditionally don’t carry too many current liabilities and are usually asset heavy.
Cash shells usually only have cash as a meaningful entry in the balance sheet, while mining exploration companies are at some stage flush with the capital required to delineate new company reserves.
This year’s top quartet comprises all three categories.
First placed is Zambian Copper Investments, with a quick ratio of 315 times.
The group morphed into a cash shell following the disposal of its only core asset, a 28.4% shareholdings in a Zambian mining company.
In second place is the Rupert investment vehicle Reinet (83.5 times), followed by coal exploration group Keaton and financial services player New CorpCapital.
A typical feature shared by those groups is they “operate under the radar”.
Without much corporate activity to speak of – especially the usual wheeling and dealing that requires capital expenditure – they manage to avoid media attention.
Being super-solvent is hardly newsworthy.
Sectors sway
The rest of this year’s top 100 is dominated by the three mentioned sectors.
It’s difficult to find representatives of other industries here, but some noteworthy groups do stand out.
A regular good performer that features again is Nu-World, a leading provider of home appliances with a quick-ratio of 2.05 times.
Still, that’s significantly lower than its quick ratio of 3.59 times in 2009.
Two media peers also feature in the higher echelons, with Caxton (41th) and Moneyweb (53rd) sporting quick ratio covers of 2.72 and 2.26 respectively.
Retailer Lewis (2.66 times), Truworths (2.57 times) and Foschini (2.21 times) have also done well.
An important guide when assessing quick ratio readers should realise is the futility to make comparisons between groups operating in different sectors.
There’s no way a manufacturer that needs continued capital outlay to fund its basic infrastructure and further growth can compare with a cash shell that holds a balance sheet of cash and negligible liabilities.
However, an intra-sector comparison does make for fascinating reading.
For example, take the retail sector.
No cross-sector simile
While Woolworths, our 200th ranked company for this index, has a quick ratio of 0.95 times – which means it won’t be able to service all its creditors without having to liquidate some of its inventory.
Sector peer Foschini has a quick ratio of 2.21 times (56th placed).
Woolies’ shareholders and creditors will probably not be too much concerned about its quick ratio of less than one times, because a substantial portion of its business consist of trading in fast-moving consumer goods.
In the unlikely event Woolworths should clear stock to pay creditors it can bargain on selling its food inventory quite quickly at a market-related price.
However, it’s more difficult to force sell clothing and apparrel at market prices, which mean it’s quite prudent of Foschini to have its debt covered more than two times by non-inventory items.
- Finweek
