Use the Quick Ratio

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Published on March 3, 2014

Author: InvestingTips

Source: slideshare.net

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http://www.CandlestickForums.com

Use the Quick Ratio

Investors and traders use the quick ratio, also known as the acid test, to determine if a company has the ability, in the near term, to pay back current debt. Creditors also use the quick ratio in deciding whether or not to extend loans to companies. Both investors and traders use the quick ratio in evaluating stocks and deciding if a stock price is likely to rise or fall. The quick ratio differs from the price to earnings ratio in that it does not measure current cash flow but rather cash, or cash equivalents, in hand. In this sense investors use the quick ratio as a measure of a stock’s margin of safety. A stock with a high quick ratio will be seen as a secure investment whereas a stock with a low quick ratio will be seen as risky. The day trader may use the quick ratio in picking stocks that might become volatile due to debt problems. If a company is currently unable to retire its debt, it may subject to stock price volatility. Following the stock with Candlestick analysis will help the trader anticipate price movement in response to this situation.

The Quick Ratio as a Fundamental of Stock Analysis

Investors use the quick ratio as part of fundamental analysis of stocks. Although the fundamentals of a stock are quickly discounted by the market, knowing fundamentals gives the investor or trader as clear idea of the likely limits of a stock’s price. In long term investing, intrinsic stock value is thought by many to be the gold standard. However, a company with great products and services still needs to manage its short term debt in order to survive. Sadly, too many promising companies go out of business or are taken over because of short term debt issues. The savvy trader will spot these stocks and use technical analysis tools such as Candlestick pattern formations in order to profitably anticipate changes in price.

Use the Quick Ratio www.CandlestickForums.com

Investors use the quick ratio, also known as the acid test, to determine if a company has the ability, in the near term, to pay back current debt. www.CandlestickForums.com

Creditors also use the quick ratio in deciding whether or not to extend loans to companies. www.CandlestickForums.com

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Both investors and traders use the quick ratio in evaluating stocks and deciding if a stock price is likely to rise or fall. www.CandlestickForums.com

The quick ratio differs from the price to earnings ratio in that it does not measure current cash flow but rather cash, or cash equivalents, in hand. www.CandlestickForums.com

In this sense investors use the quick ratio as a measure of a stock’s margin of safety. www.CandlestickForums.com

A stock with a high quick ratio will be seen as a secure investment whereas a stock with a low quick ratio will be seen as risky. www.CandlestickForums.com

The day trader may use the quick ratio in picking stocks that might become volatile due to debt problems. www.CandlestickForums.com

If a company is currently unable to retire its debt, it may subject to stock price volatility. www.CandlestickForums.com

Following the stock with Candlestick analysis will help the trader anticipate price movement in response to this situation. www.CandlestickForums.com

Investors use the quick ratio as part of fundamental analysis of stocks. www.CandlestickForums.com

Although the fundamentals of a stock are quickly discounted by the market, knowing fundamentals gives the investor or trader as clear idea of the likely limits of a stockfs price. www.CandlestickForums.com

In long term investing, intrinsic stock value is thought by many to be the gold standard. www.CandlestickForums.com

However, a company with great products and services still needs to manage its short term debt in order to survive. www.CandlestickForums.com

Sadly, too many promising companies go out of business or are taken over because of short term debt issues. www.CandlestickForums.com

The savvy trader will spot these stocks and use technical analysis tools such as Candlestick pattern formations in order to profitably anticipate changes in price. www.CandlestickForums.com

To use the quick ratio effectively one needs to understand that what constitutes an acceptable quick ratio varies among market sectors. www.CandlestickForums.com

In other words the investor or trader will compare a stock’s quick ratio with other stocks selling comparable products or services and not with the market in general. www.CandlestickForums.com

A quick ratio of 1 or better tells us that a company has cash and quickly convertible assets sufficient to retire immediate debt. www.CandlestickForums.com

It does not tell us about the company’s credit worthiness. www.CandlestickForums.com

For example, a company with substantial debt free property and plant facilities as well as a strong cash flow will typically be able to borrow money to cover short term needs even it does not have the cash on hand. www.CandlestickForums.com

We would typically not expect to see a great deal of market volatility in such a stock using Candlestick charting techniques. www.CandlestickForums.com

In trading stocks or in options trading the quick ratio is a useful guide to short term credit worthiness. www.CandlestickForums.com

Spotting stocks with questionable quick ratios and analyzing with Candlestick patterns can lead to profitable stock trading. www.CandlestickForums.com

For the long term investor finding stocks with high quick ratios can be a first step to finding valuable additions to a stock portfolio. www.CandlestickForums.com

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