Quick assets

Quick assets refer to a company’s most liquid assets that can be quickly converted into cash with minimal loss of value. They measure a company’s ability to meet its short-term liabilities without relying on the sale of inventory. 
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Updated: Jun 14, 2024

3 key takeaways

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  • Quick assets are the most liquid assets that can be quickly converted into cash to meet short-term obligations.
  • They exclude inventory and prepaid expenses, focusing only on assets that are readily accessible for immediate use.
  • Quick assets are crucial for assessing a company’s liquidity and financial health, particularly through the quick ratio.

What are quick assets?

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Quick assets are a subset of current assets that can be readily converted into cash within a short period, typically within 90 days or less. These assets are used in liquidity analysis to determine a company’s ability to meet its short-term liabilities.

Unlike total current assets, quick assets exclude inventory and prepaid expenses because these items may not be easily or quickly liquidated.

Importance of quick assets

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Quick assets are important because they provide a more stringent measure of a company’s liquidity compared to total current assets. They help investors, creditors, and analysts assess whether a company has enough liquid resources to cover its immediate liabilities without relying on less liquid assets like inventory.

This measure is particularly useful in evaluating a company’s short-term financial health and its ability to handle unexpected financial needs.

Components of quick assets

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Quick assets include the following components:

  • Cash and cash equivalents: These are the most liquid assets, including currency, bank deposits, and other short-term investments that can be quickly converted into cash.
  • Marketable securities: These are short-term investments that can be easily sold in the financial markets, such as stocks, bonds, and treasury bills.
  • Accounts receivable: These are amounts owed to the company by customers for goods or services delivered on credit, expected to be collected within a short period.

Exclusions from quick assets

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  • Inventory: Inventory is excluded because it may not be quickly sold at its book value, and selling it quickly could result in a significant discount.
  • Prepaid expenses: These are excluded because they cannot be converted into cash; they represent payments made for goods or services to be received in the future.

Example of quick assets in practice

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Consider a company with the following financial information:

  • Cash and cash equivalents: $50,000
  • Marketable securities: $30,000
  • Accounts receivable: $20,000
  • Inventory: $40,000
  • Prepaid expenses: $10,000

The quick assets for this company would be calculated as follows:

Quick Assets = Cash and Cash Equivalents + Marketable Securities + Accounts Receivable

Quick Assets = 50,000 + 30,000 + 20,000 = 100,000

This means the company has $100,000 in quick assets, providing a measure of its ability to meet short-term liabilities with its most liquid resources.

Impact of quick assets

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Quick assets have several significant impacts on the assessment of a company’s financial health:

  • Liquidity analysis: Quick assets provide a clear picture of a company’s liquidity, indicating whether it can meet its short-term obligations without relying on inventory sales.
  • Financial stability: A higher level of quick assets suggests better financial stability and the ability to handle unexpected financial challenges.
  • Creditworthiness: Companies with substantial quick assets are often seen as more creditworthy by lenders and investors, as they demonstrate the ability to cover short-term debts.

Challenges and limitations

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While quick assets are a useful measure of liquidity, they also present some challenges and limitations:

  • Exclusion of inventory: Excluding inventory can be overly conservative for companies that can quickly turn over their inventory.
  • Snapshot view: The measure provides a snapshot of liquidity at a specific point in time and may not reflect changes in cash flow or working capital management over time.
  • Industry variations: The relevance of quick assets can vary by industry, with some industries operating effectively with lower levels of quick assets.

Example of addressing quick asset challenges

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To address the limitations of quick assets, companies and analysts can:

  1. Consider inventory turnover: Evaluate the inventory turnover rate to understand how quickly inventory is converted to cash, complementing the quick asset analysis.
  2. Analyze cash flow trends**: Examine cash flow statements and trends over multiple periods to get a more comprehensive view of liquidity and financial health.
  3. Compare with industry benchmarks: Assess quick assets in the context of industry benchmarks to understand how the company’s liquidity compares with peers.

Understanding quick assets is essential for evaluating a company’s short-term financial health and liquidity. By focusing on the most liquid assets, stakeholders can gain insights into the company’s ability to meet immediate obligations and manage financial risks effectively.



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Arti
AI Financial Assistant
Arti is a specialized AI Financial Assistant at Invezz, created to support the editorial team. He leverages both AI and the Invezz.com knowledge base, understands over 100,000... read more.