As we find ourselves in the midst of a brutal bear market in 2022, it may be a good exercise to study the past in order to be better educated on what...
A quick ratio of a company can determine a lot of assets about a corporation. Similar to the Treynor Ratio, a quick ratio formula can help determine a corporation’s financial strength- or lack of strength. In this era of COVID-19 and an economic downturn, a quick ratio of a company can help investors determine if a corporation has enough liquidity to weather a financial storm. With the quick ratio formula, investors can help plan their investment strategies.
This TradingSim article will help investors calculate the quick ratios of 10 of the top corporations. In this article, I will also compare them to see which one has the most liquidity to pay off short-term debts. Investors can use this information to possibly rebalance their portfolios.
A quick ratio formula measures a company’s short-term liquidity. A quick ratio definition means that the ratio incorporates a corporation’s ability to use its cash-ready assets to pay off debt. The short-term liquidity measure is also known as the acid test. The term quick ratio comes from a company’s ability to quickly convert assets into cash.
When calculating the quick ratio of a company, the formula is as follows:
[Current assets-inventory-prepaid expenses]/current liabilities=quick ratio
When including a corporation’s marketable securities, they include common stock, certificates of deposit, or government bonds. Accounts receivable is money a customer owes a company that can be collected in 90 days.
When determining liquidity, there are specific steps to calculate the quick ratio of a company.
In determining a good quick ratio of a company, there are some numbers that are important. A total of one is usually a good number. That quotient means that for every $1 of liability, there is $1 of assets. A ratio below one typically means that a corporation may not have enough cash to pay off short-term liabilities.
A ratio of 15 means that for every $1 of liabilities, a company has $15 of assets. While a high ratio can be good, one that is too high can be detrimental. If a ratio is too high, that means the company may not be efficiently using its cash reserve.
When investors look at the quick ratio of a company, a quick ratio interpretation can give investors a lot of information. A low ratio can lead to a negative quick ratio interpretation. A lower ratio tells investors that a corporation doesn’t have enough liquidity to withstand a bear market. A high ratio tells investors that a company has enough cash on hand to cover near-term debt-especially in an economic downturn.
While a quick ratio of a company is one way to determine the liquidity of a company, there are other ways as well. A current ratio also measures a corporation’s short-term liquidity. However, a quick ratio is more stringent than a current ratio because it has fewer items to configure its calculations.
A current ratio is calculated as follows:
Current assets/current liabilities
In contrast to a quick ratio’s shortened criteria, a current ratio calculates more factors. While a current ratio’s formula is shorter, it includes all the current assets of a corporation. For example, a current ratio includes inventory and prepaid expenses. Those factors are excluded from a quick ratio of a company.
Another difference in current ratio vs. quick ratio is that a current ratio measures liquidity over a longer period of time. A quick ratio of a company measures assets that are converted to cash in three months.
While there are slight differences between current and quick ratios, there are similarities. Both ratios calculate the liquidity of a company. In addition, a current ratio of one and above is a good sign for a company. A current ratio below one is a sign a company can’t pay its debt.
A company’s liquidity can help sustain it even during a difficult economic period. Despite having a poorly performing Q1 2020 and quick ratio of 0.37, upscale retailer Nordstrom’s still has strong liquidity. Even though it isn’t a value stock , Nordstrom reported it has enough liquidity to survive a worse-than-expected earnings report.
Nordstrom’s CEO, Erik Nordstrom, noted that Nordstrom still has enough liquidity to carry it through Q2 2020.
“We’re entering the second quarter in a position of strength, adding to our confidence that we have sufficient liquidity to successfully execute our strategy in 2020 and over the longer term,” said Nordstrom.
While the quick ratio of a company is not the ultimate arbiter of a stock’s financial health, it is a strong measurement to determine a company’s liquidity.
Both Amazon and Walmart are the biggest retailers in the world. I will compare both corporations’ quick ratios to see which corporation can better cover short-term liabilities.
Amazon (NASDAQ:AMZN) is the most valuable company in the world. The online e-commerce behemoth has been a recession-proof stock during the current recession. Chantico CEO and asset allocation expert Gina Sanchez noted that Amazon has benefited from the recent quarantine.
“Amazon is the big winner in all of this because everyone [putting] off going to the grocery store has ordered directly from Amazon, has ordered anything they need from any store as most retail has been shut down from Amazon. I think Amazon has the longest, broadest story that would come out of this with the trends still intact,” said Sanchez.
Amazon is also performing so well that during a recession, the corporation hired 125,000 temporary workers since the nationwide shutdown. Amazon CFO Brian Olsavsky noted that demand for workers will grow during the summer.
“Demand has been strong and the biggest questions we have in Q2 are more about ability to service that demand,” said Olsavsky.
Amazon’s strong sales and hiring surge prove that the corporation and its stock are robust in this economic downturn.
As of March 2020, Amazon’s current assets are $67.13 billion. Amazon’s current liabilities total $79.71 billion. So, the quick ratio formula is:
Amazon’s quick ratio is 0.84. While I mentioned earlier that a quick ratio below 1 is a negative sign for a corporation, obviously Amazon is financially sound. Amazon may have other reasons why it may be more difficult for the company to meet its short-term obligations.
The quick ratio of a company may be lower than one because of high inventory turnover or increased inventory, especially in the retail industry. Inventory isn’t accounted for in a quick ratio formula.
Walmart(NYSE:WMT) is another stock that has performed well during the coronavirus crisis. In Walmart’s Q1 2021 earnings report, CEO Doug McMillon noted that increased sales of groceries and cleaning materials helped the corporation reach $134.62 billion while people were quarantined.
“We experienced unprecedented demand in categories like paper goods, surface cleaners, and grocery staples. For many of these items, we were selling in two or three hours what we normally sell in two or three days,” said McMillon.
Because of Walmart’s strong sales, financial analysts rate Walmart stock a buy. Garrett Nelson is a senior equity analyst at the CFRA research firm. Nelson rated Walmart as a strong pick for investors in a note to clients.
“Walmart remains one of our top picks, as we see it as a ‘pandemic winner’ that is likely to pick up share from the distress taking place across retail, particularly small businesses, department stores, and others levered to shopping malls,” wrote Nelson.
Neil Saunders, managing director at GlobalData Retail, also noted that Walmart is a buy-even more so than Amazon.
“That Walmart has outperformed Amazon, at least in growth terms, underlines both the deficiencies of Amazon in grocery – which generated the bulk of sales this quarter – and Walmart’s growing power in the segment,” said Neil Saunders, managing director at GlobalData Retail.
As of April 2020, Walmart’s current assets excluding inventory is $22.1 billion. Walmart’s current liabilities are $82.65 billion. The equation would then be:
In comparison between Amazon and Walmart, 0.84 is greater than 0,27. Amazon’s quick ratio is higher than Walmart’s ratio.
Walmart has a lower quick ratio because of its increased inventory. Because Walmart has more physical inventory than Amazon, which isn’t included in quick ratios, Amazon ranks higher.
In addition to inventory, Walmart’s quick ratio is lower than Amazon’s quick ratio because of debt. Even though Amazon has expenditures of $4 billion, Walmart’s expenditures are topping $900 million for Q1 2021. Because Walmart has more inventory and increasing expenses, its quick ratio is lower than Amazon’s quick ratio.
Walmart’s expenses increased because of its extra bonuses to workers and increased spending on sanitizing store locations. Brent Biggs, Walmart’s chief financial officer, noted that added expenses could add to Walmart’s liability.
“[W]e’ve already announced a second round of special bonuses in the U.S. which that will financially hit in the second quarter,” said Biggs.
The increased expenses and physical inventory give Amazon’s quick ratio an edge over Walmart.
Apple and Google are rivals in the smartphone market with Apple’s iPhones battling Google’s Android system. Both corporations have become giants in tech with their innovation. But which company has the best quick ratio?
In Apple’s(NASDAQ:AAPL) Q2 2020 earnings report, Apple had an increase in revenue. The company’s iPhone sales declined because of the coronavirus slowing down production in China. Chief financial officer, Luca Maestri, noted that Apple Watches and other wearable devices still had strong sales.
“Today Apple reports $58.3 billion in revenue, an all-time record for services and a quarterly record for Wearables, Home and Accessories. It was also a quarterly revenue record for Apple Retail, powered by phenomenal growth in our online store. Amid the most challenging global environment in which we’ve ever operated our business, we are proud to say that Apple grew during the quarter,” said Maestri.
Maestri also noted that Apple would continue its growth and commit and contribute more to the U.S. economy.
“We are confident in our future and continue to make significant investments in all areas of our business to enrich our customers’ lives and support our long-term plans — including our five-year commitment to contribute $350 billion to the United States economy,” added Maestri.
Even though Apple’s sales increased in the U.S., Apple has struggled to maintain a foothold in India. Despite that, JP Morgan Chase Samik Chatterje rates Apple stock as a buy. He believes that if Apple iPhone SE sales increase in India, Apple’s price target could rise from $350 to $365.
“Apple has struggled to date to build a material presence in India on account of premium price positioning as well as other drivers,” he wrote, We estimate if Apple were able to capture roughly half of the 30 million to 35 million opportunity, it would translate into a 215 million steady annual replacement run-rate for iPhones globally and a $7 billion revenue or $0.70 cents of EPS upside,” noted Chatterje.
Evercore ISI analyst Amit Daryanani is another financial analyst that’s bullish on Apple stock. He believes that Apple is a stock that will continue to outperform.
“Apple continues to offer the best risk/reward in large-cap tech and long-term investors should use any weakness to add to positions,” said Daryanani.
Daryanani also noted that Apple could also have a $2 trillion market value in the future.
“This implies EPS growth of 14% over next several years driven by combination of operational tailwinds and buyback support,” said Daryanani.
As of March 31, Apple’s assets minus inventory total $140.42 billion. The company’s liabilities equal $96.09 billion. The quick ratio formula is:
Therefore, Apple’s quick ratio is 1.46. That’s well above the standard for a quick ratio of a company.
Google’s (NASDAQ:GOOG) Q1 2020 earnings report was $41.16 billion, a strong showing despite a drop in ad revenue over the last few months. As a result of the economic slowdown, many corporations are not spending as much to advertise on Google as they did pre-pandemic.
Despite the decline in ad revenue in March, the decline wasn’t as deep as expected. YouTube has been a bright spot with its surge in revenue. The video-sharing site’s Q1 2020 revenue jumped by 36% to $15 billion. Google’s parent Alphabet chief financial officer Ruth Porat, spoke about YouTube, one of Google’s most valuable acquisitions.
“[For YouTube], the biggest part of ad revenue is Brand and we’re really excited about that and the upside there… One of the things we’re extremely focused on is ensuring that we’re providing advertisers with the tools they need to really present their brand the way they want, how they want and really to protect and measure that,” said Porat.
Morgan Stanley analyst Brian Nowak says Google stock is a buy because the corporation is branching out into gathering health care data and moving into education.
“We are particularly positive on its emerging e-commerce products (shopping listings, virtual show rooms, deep linking, etc), focus on [small and medium-sized businesses], and efforts to drive digital transformation in the healthcare and education industries. Google’s Waymo autonomous vehicles business is also the market leader in AV technology,” said Nowak.
In this equation to determine Google’s quick ratio, I’ll look at the current assets excluding inventory and liabilities. Google’s assets as of March are $146.13 billion. Google parent Alphabet’s liabilities total $40.19 billion. Therefore, the quick ratio formula is:
Google’s quick ratio is 3.64. That quotient is much higher than Apple’s 1.46. Google is more likely than Apple to be able to pay off short-term liabilities.
President Donald Trump has affected Twitter’s(NASDAQ:TWTR) stock. The social media site has been under fire from the president for fact-checking several of his latest controversial tweets and flagging some other messages. Twitter explained why it felt the need to flag a recent tweet of Trump’s for “glorifying violence.”
“We’ve taken action in the interest of preventing others from being inspired to commit violent acts, but have kept the Tweet on Twitter because it is important that the public still be able to see the Tweet given its relevance to ongoing matters of public importance,” noted Twitter.
Trump has threatened to sign an executive order to give the Federal Communications Commission more power to regulate Twitter.
While Twitter stock initially fell 4% last week after Trump’s threat, financial analysts say that Twitter stock won’t stay down for long. Baird Capital analyst Colin Sebastian wrote in a note to clients that Trump’s criticism won’t always adversely affect Twitter stock.
“It is difficult for us to see how the dispute over content moderation would meaningfully impact the vast majority of social media usage. Consequently, we would not expect any material impact on revenue, as advertisers will follow traffic and eyeballs,” wrote Sebastian.
Twitter had a positive past earnings report in Q1 2020. However, Twitter had a downturn in its ad revenue.
“Revenue was $808 million in Q1, up 3% year over year, reflecting a strong start to the quarter that was impacted by widespread economic disruption related to COVID-19 in March. Reduced expenses partially offset the revenue shortfall, resulting in an operating loss of $7 million,” said Twitter.
In addition to Google, Twitter also had a decline in ad revenue because of the COVID-19 crisis slowing down business. The company noted the at economic downturn hurt advertising revenue numbers.
“As an indication of the rapid change in advertising behavior, from March 11 (when many events around the world began to be canceled and we made working from home mandatory for nearly all our employees globally) until March 31, our total advertising revenue declined approximately 27% year over year,” noted Ned Segal, Twitter’s chief financial officer.
As of March 2020, Twitter’s current assets minus inventory total 8467.579. Twitter’s liabilities equal 710.02. In the quick ratio formula,
Therefore, Twitter’s quick ratio is 11.93.
Just as Twitter stock dropped slightly after challenging Trump, Facebook(NASDAQ:FB) stock dipped after the company also caught in Trump’s war on social media.
Facebook CEO Mark Zuckerberg noted that he disapproved of Trump’s attempts to control social media companies.
“I’ll have to understand what [the President] actually would intend to do, but in general I think a government choosing to censor a platform because they’re worried about censorship doesn’t exactly strike me as the right reflex there,” said Zuckerberg.
In contrast to Twitter, Facebook isn’t flagging Trump’s posts and refuses to fact-check posts on their site.
“I just believe strongly that Facebook shouldn’t be the arbiter of truth of everything that people say online. Private companies probably shouldn’t be, especially these platform companies, shouldn’t be in the position of doing that,” said Zuckerberg.
Before the controversy around Facebook, analysts rated Facebook as a buy. Many of them believe that the controversy will have a short-term effect on Facebook stock. Financial analysts believe that since Facebook announced an e-commerce division of the site, Facebook Shops. Deutsche Bank analysts wrote in a note to clients that Shops could be a multibillion revenue stream for Facebook.
“We think Facebook Shop in a simplistic bull case could drive up to as much as a $30 [billion] revenue opportunity, across a combination of take-rate driven transactional and advertising revenue,” wrote the analysts.
AB Bernstein analysts also rated Facebook stock a buy because of the new Shops venture. They believe that Facebook can be a vital part of e-commerce like Amazon.
“We have long viewed FB as the ‘rent’ to the digital economy and a core component of the online retail ecosystem,” the analysts wrote.
As of March 2020, Facebook’s current assets excluding inventory are $69.349 billion. The social media’s company’s liabilities total $15.69 billion. To calculate the quick ratio formula, the equation would be as follows:
Facebook’s quick ratio formula is: 69.349-/15.69=4.60
Therefore, Twitter’s quick ratio of 11.93 is much greater than Facebook’s 4.60. Twitter has a greater ability to pay off short-term debt than Facebook.
Uber (NASDAQ:UBER) and Lyft (NASDAQ:LYFT) are competing ride-sharing services that have been struggling as people are staying home during the quarantine. Despite the troubles the companies are experiencing, they have different quick ratios.
Uber’s Q1 2020 earnings report was positive despite COVID-19’s effect on the company’s ridership numbers, creating $2.9 billion in losses. The corporation made $3.5 billion in revenue, a 14% increase. Uber’s chief financial officer, Nelson Chai, noted that the company has enough liquidity to weather the current economic volatility.
“Our ample liquidity provides us with substantial flexibility to navigate the current crisis, but we are being proactive and taking actions to emerge stronger and more focused as a company,” said Chai.
Uber also said that while ridership fell, the company had success with its food delivery service Uber Eats. CEO Dara Khosrowshahi noted that Uber stock should rise once the economy re-opens.
“Along with the surge in food delivery, we are encouraged by the early signs we are seeing in markets that are beginning to open back up,” said Khosrowshahi.
Financial analysts rate Uber stock after its positive earnings report. As Uber cut its workforce, the company has cut costs. Ironically, Uber’s decision to eliminate 6,000 jobs lifted the stock up and is a good sign to CFRA analyst Angelo Zino. Zino wrote in a note to clients that Uber’s ride-sharing division can be more profitable with fewer overhead costs.
“We[CFRA] applaud [the cost savings] as it will allow the Rides segment to be profitable at a much lower run rate. We anticipate a tempered recovery in the ridesharing market without a vaccine for Covid-19, with the segment unlikely seeing previous peak volume over the next 2 years,” wrote Zino.
“That said, we see UBER being profitable on an adjusted EBITDA basis by the second half of ‘21. We believe the moves (includes office reductions) will allow UBER’s cost structure to become more variable,” added Zino.
Bank of America Securities analyst Justin Post is also bullish on Uber stock after the cost-cutting measures.
“We think these changes underscore a more focused and mature Uber and will likely result in an accelerated path to break-even if end markets recover,” wrote Post.
Even though Uber and Lyft have survived the economic slowdown, there are other financial analysts who think the ridesharing services still face an uphill climb. Wedbush analyst Dan Ives noted that Uber and Lyft need more time to recover after the economy re-opens.
“It’s still a slow thaw, and with multiple macro levers over the course of the year, and likely an even longer return to normal environment, including business travel, there’s still a long road ahead for rideshare,” said Ives.
As of March, Uber’s current assets are $11.11 billion. Uber’s liabilities are $6.63 billion. The quick ratio formula is:
So, Uber’s quick ratio is 1.68.
Even though Lyft stock was adversely affected by the nationwide lockdown, the company still reported good news. Lyft reported Q1 2020 sales of $955.712 million. That figure beat experts’ expectations of $897.860 million.
“While the COVID-19 pandemic poses a formidable challenge to our business, we are prepared to weather this crisis. We are responding to the pandemic with an aggressive cost reduction plan that will give us an even leaner expense structure and allow us to emerge stronger,” said Green.
Similar to Uber, Lyft’s chief financial officer Brian Roberts also noted that the corporation was reducing costs.
“In these uncertain times, we are building on that progress by taking decisive action to reduce costs and further improve our operating efficiency. We expect to remove approximately $300 million from our annual expense run-rate by the fourth quarter of 2020 relative to our original expectations for 2020,” said Roberts.
Financial analysts are divided on whether Lyft is a buy. Piper Sandler’s Alex Potter downgraded his rating of Lyft. He believes that riders will be hesitant to enter Lyft cars because of COVID-19 fears.
“Sequential gains are encouraging, but since ride-hailing involves sharing indoor air with strangers, we expect riders may remain wary for some time,” said Potter.
While Potter is bearish on Lyft stock, Needham’s Brad Erickson is bullish on Lyft stock. He rates the ridesharing company’s stock as a buy.
“We are unwavering in our view that the secular story of ride-hailing adoption is intact if and as we move through COVID,” noted Erickson.
As of March, Lyft’s current assets totaled $3.144754 billion. Liabilities equaled $2551.14 billion. In the quick ratio formula,
Lyft’s quick ratio of 1.23 is less than Uber’s 1.68. Uber has a greater ability to pay its short-term liabilities than Lyft.
Tesla was founded just a few years ago, but is already challenging the established automobile company General Motors (GM). I will examine which corporation has a higher quick ratio.
Like all automobile corporations, Tesla’s( NASDAQ:TSLA) production ground to a halt after coronavirus caused a nationwide shutdown. Despite the shutdown, Tesla turned a profit in a better-than-expected Q1 2020 earnings report with revenue of $5.99 billion. CEO Elon Musk spoke about the results.
“So, Q1 ended up being a strong quarter despite many challenges in the final few weeks. This is the first time we have achieved positive GAAP( generally accepted accounting principles) net income in a seasonally weak first quarter,” said Musk.
Musk also spoke about how Tesla has $8 million available in cash despite a reduction in demand for Tesla during the economic slowdown.
Tesla’s positive Q1 2020 earnings report makes Tesla a buy to Wedbush’s Dan Ives. He wrote in a note to clients that he believes Tesla stock can continue to perform well now that the company’s factories are re-opened.
“Tesla appears to be turning the corner from both a demand and production perspective heading into the month of June,” wrote Ives.
Ives also believes that the international demand for Tesla’s Model 3 will help the company’s stock.
“While second-quarter delivery numbers remain in flux due to a host of logistical issues as well as overall lockdown conditions now starting to ease across the U.S. and Europe, it appears underlying demand for Model 3 in China is strong with a solid May and June likely in the cards and clear momentum heading into the second half,” added Ives.
While Ives is bullish on Tesla stock. Bank of America analysts are bearish on Tesla stock. The analysts believe that even though Tesla is re-opened, production restarts will still be difficult to implement.
Analysts also noted Tesla’s re-opening “will likely prove toughest with production restarts/ramps that continue to be pushed out, which may disproportionately hit (Tesla) by derailing its ongoing capacity/production expansion across its plants (Model Y in Fremont, Model 3 in Shanghai, Giga (Berlin)”.
As of March, Tesla current assets excluding inventory are $14.893 billion. The company’s liabilities equal $ 11.986 billion. The quick ratio formula would be:
Tesla’s quick ratio is 0.87.
GM had a better-than-expected earnings report despite COVID-19 slowing down production. Chief financial officer Dhivya Suryadevara touted the corporation’s liquidity in its latest financial results.
“Our liquidity continues to be very strong at $33.4 billion at the end of first quarter. Even in an extreme scenario with zero production, our current levels of liquidity will take us into Q4 of 2020. In addition, the capital markets continue to be open as a way to access additional layers of liquidity to take us beyond that time frame,” said Suryadevara.
Because of GM’s positive earnings report, Deutsche Bank upgraded its rating of GM stock to a buy in May.
“GM’s strong 1Q performance and forward-looking outlook, in our view demonstrate the benefit from its proactive actions to transform the business, right size its costs and boost profitability. They should leave GM best positioned to weather challenging 2Q conditions, and yield considerable improvement in profit and free cash flow in 2H and into 2021.”
GM’s stock rose 6% after the Q1 2020 earnings report. The company had its stock slide 40% throughout the year. However, GM is showing resilience as it re-opens its factories as the economy re-opens.
As of March, GM’s current assets equaled $86.90 billion. GM’s liabilities totaled $91.29 billion. Therefore, the quick ratio formula is:
GM’s quick ratio is 0.95.
GM’s 0.95 is greater than Tesla’s 0.87. GM has more liquidity and can more easily pay off short-term debt better than Tesla.
While a quick ratio of a company is just one way to measure a corporation’s success, it is a vital metric. A quick ratio interpretation can help investors choose the best stocks that can pay off short-term debt. TradingSim charts and blog posts can also help investors find the best stocks with the most liquidity to easily pay off debt and give investors better results.