What is the Quick Liquidity Ratio?
The quick liquid ratio is the total amount of capital of a company fast assets divided by the sum of its net liabilities, and for insurance companies includes reinsurance Passives. In other words, it shows how many assets easily convertible into money, such as cash, short-term investments, stocks, and maturing corporate and government bonds, an insurance company can draw on the short term to meet its financial obligations. .
Key points to remember
- The quick liquid ratio is the total amount of quick assets of a company divided by the sum of its net assets liabilities and reinsurance liabilities.
- This calculation is one of the most rigorous means of determining a debtor’s ability to repay its current debts without the need to raise external capital.
- The quick liquid ratio is an important measure of an insurance company’s ability to cover its liabilities with relatively liquid assets.
- If an insurer has a high quick-cash ratio, it is in a better position to make payments than an insurer with a lower ratio.
How the Quick Liquidity Ratio Works
Investors have at their disposal several liquidity ratios to assess a company’s ability to quickly and cost-effectively convert the assets it owns into cash. The Quick Liquidity Ratio, which typically only considers resources that can be turned into cash without loss of value within 90 days, is widely considered one of the most stringent ways to determine a of the debtor ability to repay current debts without the need to mobilize external capital.
Quick liquidity ratios are usually expressed as a percentage. The higher the percentage, the more liquid and able to repay any monies owed to the company.
A company with a low quick cash ratio that finds itself with a sudden increase in its liabilities may have to sell long-lived assets or borrow money.
Quick Liquidity Ratio Example
The Quick Liquidity Ratio is an important measure of an insurance company’s ability to cover its liabilities with relatively cash. assets.
Suppose an insurer covers a large number of properties in Florida and then a hurricane hits the area. This insurer will now have to find more money than he would normally expect to pay complaints. If such an insurer has a high quick-cash ratio, it will be in a better position to make payments than an insurer with a lower ratio.
Quick ratio vs current ratio
Like the quick liquidity ratio, the Current Ratio also measures the value of a business short term liquidity, or the ability to generate enough cash to pay off all debts if they become due at one time. The Quick Liquidity Ratio is considered more conservative than the Current Ratio because it takes fewer assets into consideration.
The Quick Liquidity Ratio further refines the current ratio by measuring the level of the most liquid current assets available to cover current liabilities. It does not include inventory and other assets such as prepaid expenses which are generally perceived as harder and slower to turn into cash.
This ultimately means that quick ratios and current ratios can differ significantly. For example, a company storing a lot of inventory might have a high current ratio and a low quick ratio. Investors concerned about this company’s short-term liabilities might choose to reject the current ratio and focus more on the fast cash ratio, aware that its inventory, while valuable, can be difficult to offload and turn into cash. quickly enough to settle a sudden increase in obligations.
A company that offers a mix of different types of insurance policies is better compared to peers that offer a similar mix, as opposed to comparing that company to insurers that only offer a specific, smaller range of products.
When evaluating a potential investment in an insurance company, an investor should evaluate the types of plans it offers, as well as how the company intends to cover its liabilities in the event of an emergency. . The range of percentages considered “good” depends on the type of policies an insurance company offers. Property insurers are likely to have quick liquidity ratios above 30%, while liability insurers may have ratios above 20%.
In addition to assessing the quick ratio, investors should look at a company’s situation current liquidity ratio, which shows how well it can cover liabilities with invested assets, and overall liquidity ratiowhich shows how a company can cover its liabilities with its total assets.