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Finance GlossaryQuick Ratio
Quick Ratio
Definition of Quick Ratio
The Quick Ratio, also known as the acid-test ratio, measures a company’s ability to meet short-term liabilities using its most liquid assets. It is calculated as (Current Assets - Inventory) divided by Current Liabilities, excluding less liquid inventory from current assets. A Quick Ratio above 1 indicates a company's strong liquidity to cover obligations without selling inventory, helping investors evaluate financial stability and short-term solvency.
Related Terms
Derivative
A derivative is a financial contract that is designed to derive its value from a single or group of underlying assets, generally between two parties or more. It contains a pre-agreed date of delivery and price.
The most common examples of a derivative contract are:
The most common examples of a derivative contract are:
- Futures
- Options
- Forwards
- Swaps
A derivative can be bought and sold on an exchange or over the counter. Since derivatives derive value from underlying assets, their price is known to fluctuate when the underlying asset gains or loses value.
Technical Analysis
Technical analysis refers to the study of past price movements of a stock and trading volumes. This type of analysis is used by investors and traders to predict price trends in the future. The evaluation is carried out based on charts, patterns, and indicators like moving averages or RSI. Investors and traders can make informed decisions based on technical analysis. It differs from fundamental analysis as the focus lies on price behavior and not the financials of the company. As a result, investors get to know easy entry and exit points.
Arbitrage
Arbitrage is a strategy where a security is bought in one market and sold in another market to generate profits due to the difference in price. This difference is known to be minor.
Say for example a share trades at Rs. 1000 on NSE and Rs. 1002 on BSE. The share can be arbitraged by buying it on BSE and selling it on BSE for a profit of Rs. 2.
Say for example a share trades at Rs. 1000 on NSE and Rs. 1002 on BSE. The share can be arbitraged by buying it on BSE and selling it on BSE for a profit of Rs. 2.
Income Stocks
Income stocks are shares of companies that help you earn a steady income, typically in the form of dividend payouts. At the same time, income stocks are known to have lower risk compared to others and thus, relatively decent returns over a period of time. But the consistently growing dividend yield makes up for the perceived lack of returns.
EBITDA MARGIN
EBITDA margin is the ratio of Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) by revenue, represented as a percentage. It is used to understand whether a company is profitable and as a valuation technique.
The formula to calculate EBITDA margin is: EBITDA Margin = (EBITDA/Revenue)*100
Just like EBITDA, the EBITDA margin also excludes non-cash expenses. That’s why a positive EBITDA margin doesn’t necessarily mean that a company is profitable.
The formula to calculate EBITDA margin is: EBITDA Margin = (EBITDA/Revenue)*100
Just like EBITDA, the EBITDA margin also excludes non-cash expenses. That’s why a positive EBITDA margin doesn’t necessarily mean that a company is profitable.
Diversification
Diversification is the act of investing in more than one asset class, sector, industry, or country to mitigate risk. It is an investment strategy designed to reduce risk by pairing a volatile asset class like equities with a fixed income asset class like fixed deposits. Or, by investing in equities in one country and complementing it by investing a portfolio in stocks from another country.
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