Quick Ratio

Meaning
Quick ratio assesses a company's capacity to pay off its outstanding obligations using just
those assets that can be swiftly turned into cash. A company's financial resources comprise
cash and its many forms of cash equivalents (Achim & Chis, 2014).

Purpose
A quick ratio is short-term investments, cash, and cash equivalents divided by current
commitments. "Quick assets" are readily convertible investments. When a company's quick
ratio is less than 1, it lacks the liquid assets to satisfy its immediate commitments. If the quick
ratio is smaller than the current ratio, current assets rely on inventories. The quick ratio is
more conservative than the current ratio since it excludes inventory. When a company sells
long-term assets, it impacts itself. It tells investors the company's current operations aren't
lucrative enough to meet its commitments (Adali & Kizil, 2017).

A quick ratio of 1 suggests a company's quick assets equal its current assets. This
demonstrates the company can pay its debts without selling long-term assets. A quick ratio
higher than 1 suggests more quick assets than current liabilities. A quick ratio increases a
company's liquidity. This makes it easier to convert assets to cash. Financial institutions may
relax knowing their loans will be repaid on schedule. High ratios aren't always wise. Even if
money accumulates, it's not reinvested, returned to investors, or utilised for other goods.
Billion-dollar IT companies generally have 7 or 8 quick ratios. Activist investors demand a
more significant piece of these companies' income. (Agriyanto, Rohman, Ratmono, &
Ghozali, 2016)

Importance
lenders use the quick ratio because it demonstrates how quickly assets can be converted into
cash and how much of a company's obligations can be paid off. A company's ability to
respond quickly to changes in the business environment is reflected in this ratio, which
lenders often scrutinise. In a perfect world, a company's quick ratio should be roughly 1:1,
which means that its current assets are sufficient to pay short-term liabilities. Low quick
ratios are more risky investments because the company's current debt exceeds its current cash
reserves. A larger quick ratio is preferable since it indicates that the company has enough
cash on hand. When a corporation's quick ratio is very high, it may indicate that the company
isn't making good use of its cash reserves to expand its operations (Munteanu, Berechet, &
Scarlat, 2016).
Limitation
The quick ratio may only compare similar companies and not different industries. A quick
ratio is solely mathematics, with no relation to assets or liabilities. It doesn't consider
payment time. Even though the quick ratio suggests otherwise, current assets may include
accounts receivable that will never be recovered, or accounts receivable retrieved after more
than a year. This ratio is likely wrong. Even if the ratio is over one, inventory represents a
significant fraction of current assets (Schaltegger & Burritt, 2010).

Debt to Equity Ratio

Meaning
The debt-to-equity ratio is a measurement of a company's debt compared to the equity owned
by its shareholders. When calculating the D/E Ratio, total equity is used instead of total debt
as the denominator. This ratio reveals to shareholders the proportion of a company's capital
structure comprised of either debt or equity.

Purpose
When evaluating a corporation's debt-to-equity (D/E) ratio, leverage is a significant factor. A
higher leverage ratio results in an increased risk for shareholders. It might be challenging to
compare D/E ratios across businesses due to the wide range of permissible amounts of debt.
Investors will adjust the D/E ratio to account for the specific risks associated with long-term
liabilities instead of short-term debt and payables. A company's D/E ratio reveals how it takes
on more debt to grow its asset worth. A high debt to equity ratio indicates a potentially risky
growth plan. There is a possibility of increased profits for a business that finances its
expansion with debt. If leverage results in an increase in profitability that is greater than the
interest paid on loans, then shareholders should gain. A company's stock price may see a
steep decline if the rising borrowing costs surpass the rise in profits. The costs of borrowing
money are affected by market circumstances. It's possible that unprofitable loans won't be
immediately apparent. Changes in the D/E ratio tend to be more significant due to the greater
magnitude of long-term debt and assets. When evaluating a company's short-term leverage
and capacity to pay loans that are due within the next year, investors may consider various
factors (Srivastava & Lognathan, 2016).
Importance
leverage describes how a company uses debt to fund its operations and acquire assets. It is
termed highly leveraged when most of a company's financing comes from debt. The greater
the debt-to-equity ratio, the more likely it is to be a highly indebted business. There will be
variations in the debt-to-equity ratio depending on the industry. This is because various
organisations need varying amounts of debt and cash to function and grow. Significant debt-
to-equity ratios imply a high level of risk for the company concerned. In other words, a high
debt-to-equity ratio indicates that the corporation is borrowing money to fund its expansion.
So lenders and investors frequently favour the business with a lower debt-to-equity ratio. On
the other hand, the debt-to-equity ratio is evaluated in light of previous fiscal years' data.
Consequently, a significant rise in the company's debt-to-equity ratio indicates an aggressive
use of debt financing for its development plan. When comparing the ratio to the average ratio,
it is essential to prevent misunderstanding. For the most part, service businesses' debt-to-
equity ratios are more significant than intensive capital corporations (Yadav, Kumar, &
Bhatia, 2014).

Limitation
Total liabilities and shareholder equity are deemed equal if the debt-to-equity ratio equals 1.
Because it is so industry-specific, the current-to-noncurrent asset ratio is very variable.
Companies with a large amount of intensive capital are expected to have a more excellent DE
than those with a smaller capital. More corporations can tolerate a debt-to-equity ratio of 1.5-
2 or less. If a company's debt to equity ratio is over two, it's considered large enough.
Companies with high debt to equity ratios may not have the ability to meet their debt
commitments. Low debt-to-equity ratios indicate that a corporation is taking advantage of the
potential for more significant profit margins that financial leverage offers.
Bibliography
Achim, A., & Chis, A. (2014). Financial accounting quality and its defining characteristics.
SEA: Practical Application of Science, 2(3), 93-98.
Adali, S., & Kizil, C. (2017). A Research on the Responsibility of Accounting Professionals
to Determine and Prevent Accounting Errors and Frauds: Edirne Sample. EMAJ:
Emerging Markets Journal, 7(1), 53-64.
Agriyanto, R., Rohman, A., Ratmono, D., & Ghozali, I. (2016). Accrual based accounting
implementation: an approach for modelling major decisions. Risk Governance &
Control: Financial Markets and Institutions, 6(4), 531-539.
Ramly, Z. (2013). Corporate governance, shareholder monitoring and cost of debt in
Malaysia. International Journal of Social, Behavioral, Educational, Economic,
Business and Industrial Engineering,, 7(4), 1062-1073.
Yadav, B., Kumar, A., & Bhatia, S. (2014). Concept of creative accounting and its different
tools. International Journal of Management and Social Sciences Research (IJMSSR),
3(2), 66-74.
Schaltegger, S., & Burritt, L. (2010). Sustainability accounting for companies: Catchphrase
or decision support for business leaders? Journal of World Business, 45(5), 375-384.
Srivastava, P., & Lognathan, S. (2016). Impact of accounting information for management
decision making. IJAR, 2(5), 171-174.
Munteanu, V., Berechet, M., & Scarlat, L. (2016). Financial accounting information system-
premise of managerial act. Knowledge Horizons. Economics, 8(2), 88.