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Market View
Tracked by: 1 Boarder
Dear OT,
I thought about the strategy we discussed yesterday and i feel to make best use of the time-decay in the last week, i think we should sell ITM Options. I'm adding one more to the list..
One
4400 CE @ 194
4400 PE @170
Two
------
Sell this month 4500 CE @ 57
Buy next month 4500 @ 150
Sell this month 4500 PE @ 105
Buy next month 4500 PE@ 203
Three
-------
Sell this month 4500 CE @57
Buy next month 4600 CE @107
Sell this month 4500 PE @ 105
Buy next month 4400 PE@ 160
Four ( as of this morning from NSE)
sell 4400 CE @ 95
sell 4500 PE @ 115
Buy next month 4400 CE @196
4500 PE @ 210
or
Buy next month 4500 CE @142
4400 PE @ 162
Cheers
...
In reply to:
Option positions taken-OT
Posted by :
Oldtimer
Great work Eshers -
We'll see what the costs of the straddles / strangles are on the first day of the new series.
Now I really feel like shouting Cheers!
Tracked by: 67 Boarders
Hi HLN,
I have a quote (mesage dt 20Aug.08 by MOD)for you since you had not admitted deletion of messages which were critical of you
Quote
Posted by : MMB Moderator
Dear pradesh,
Your earlier messages were marked offensive by hindlevernet.
-MMB Moderator...
Unquote...
In reply to:
WILL NIFTY HIT 3600 & SENSEX TOUCH 12000
Posted by : hindlevernet
Nobody need to delete any
INSUBSTANTIAL or TENUOUS
messages as they die their
own death as they carry no
weight apart from just noise.
Tracked by: 0 Boarder
Should you time the markets?
Should you time the markets? Only if you have the necessary insight and discipline to know when to"hold" and when to "fold" as the song says. Both of these are very hard to come by. For most of us, risk is having your money available when you need it. If you can't afford a 30% drop in value, you shouldn't be in longer term assets in the first place.
If you decide to time the markets, remember one thing. Those who are really good at market timing aren't going to do television and newspaper interviews just before the crash. You'll only know what they did a few months after the fact. If you can't do it yourself, you probably shouldn't try.
If you only invest in stocks when the guys at work have made lots of money or your GICs aren't paying anything, you probably are doing exactly the wrong thing. Investing when newspaper headlines are doom and gloom and the boys have been blown away would be a better timing strategy. At the peak, it's impossible to find a bearish forecast. At the bottom its impossible to see the upside....
In reply to:
Market Timing Strategies
Posted by :
Infy_fan_always
Does Market Timing Work?
It has become accepted wisdom in financial circles that it is impossible to consistently "time the markets". This has resulted partly from the theoretical academic arguments that no one can have such an advantage (legally!) in their "efficient markets". In practice, the complexity of modern financial markets means that it is very, very difficult to predict the vast number of variables that can affect the markets. Who knew that Saddam Hussein planned to invade Kuwait in 1990 and the price of oil would soar? An investor predicting the unification of Germany and its resultant affect on the capital markets would have been shipped to the funny farms only a couple of years before it happened.
It is possible to establish a valuation level for the markets, like a stock. Compare these tasks. A small company might have a few competitors, a known product line and management. The cashflows can be identified and assessed. Even so, where we can value this company, its stock might not be appropriately valued for years and its future prospects depend on the economy in general. What about the market overall? Who is the management? What matters most, monetary policy or fiscal policy? What are demographics doing to demand? What about international considerations?
That is why most market mavens have one or two great predictions before they are hopelessly out to lunch in the forecasting wilderness. While it is possible to tie it all together a few times, it is virtually impossible to do it consistently.
Most good market strategists only try to indentify "extremes" when things are very overvalued. They stay invested until these periods, knowing the smaller swings are "noise" that usually work themselves out. Even so, staying in cash until the eventual crash comes gets harder and harder as the markets run ahead. Usually the final charge of the bull market results in public "bears" being hopelessly discredited and throwing in the towel at exactly the wrong moment.
Tracked by: 0 Boarder
Does Market Timing Work?
It has become accepted wisdom in financial circles that it is impossible to consistently "time the markets". This has resulted partly from the theoretical academic arguments that no one can have such an advantage (legally!) in their "efficient markets". In practice, the complexity of modern financial markets means that it is very, very difficult to predict the vast number of variables that can affect the markets. Who knew that Saddam Hussein planned to invade Kuwait in 1990 and the price of oil would soar? An investor predicting the unification of Germany and its resultant affect on the capital markets would have been shipped to the funny farms only a couple of years before it happened.
It is possible to establish a valuation level for the markets, like a stock. Compare these tasks. A small company might have a few competitors, a known product line and management. The cashflows can be identified and assessed. Even so, where we can value this company, its stock might not be appropriately valued for years and its future prospects depend on the economy in general. What about the market overall? Who is the management? What matters most, monetary policy or fiscal policy? What are demographics doing to demand? What about international considerations?
That is why most market mavens have one or two great predictions before they are hopelessly out to lunch in the forecasting wilderness. While it is possible to tie it all together a few times, it is virtually impossible to do it consistently.
Most good market strategists only try to indentify "extremes" when things are very overvalued. They stay invested until these periods, knowing the smaller swings are "noise" that usually work themselves out. Even so, staying in cash until the eventual crash comes gets harder and harder as the markets run ahead. Usually the final charge of the bull market results in public "bears" being hopelessly discredited and throwing in the towel at exactly the wrong moment....
In reply to:
Market Timing Strategies
Posted by : Infy_fan_always
Quantitative Measures
Quantitative techniques involve associating different market measures or "variables" in quantitative equations or "models". For example, an analyst might "build a model" that related the movements in stock prices to money supply, dividend yields and economic activity. From this, he would attempt to indentify the periods when the market had setbacks. The analyst would then develop some "decision rules" or guidelines to dictate his trading positions that would be programmed into his model. This type of investing is formally called "Tactical Asset Allocation" (TAA). It has become very popular and results in large flows in modern financial markets.
Tracked by: 0 Boarder
Quantitative Measures
Quantitative techniques involve associating different market measures or "variables" in quantitative equations or "models". For example, an analyst might "build a model" that related the movements in stock prices to money supply, dividend yields and economic activity. From this, he would attempt to indentify the periods when the market had setbacks. The analyst would then develop some "decision rules" or guidelines to dictate his trading positions that would be programmed into his model. This type of investing is formally called "Tactical Asset Allocation" (TAA). It has become very popular and results in large flows in modern financial markets....
In reply to:
Market Timing Strategies
Posted by : Infy_fan_always
Fundamental Indicators
Fundamental indicators are financial and economic measures that affect the overall valuation of the market. A good example of this would be money supply. Generally, a loose monetary policy and expanding money supply indicate healthy financial markets. When monetary policy is tightened, as in 1994, the price of longer term assets like stocks and bonds fall as money and credit become scarcer. Another fundamental measure would be the dividend yield on stocks, the dividend divided by the stock price, both the absolute level and the relative level compared to bonds. From a historical standpoint, when the overall dividend yield on the stock market is below 2%, independent of other factors, this means that the stock market is expensive. When the dividend yield on stocks is low relative to bond yields, this means investors are willing to pay more for stocks relative to bonds than has generally been the case historically.
Tracked by: 0 Boarder
Fundamental Indicators
Fundamental indicators are financial and economic measures that affect the overall valuation of the market. A good example of this would be money supply. Generally, a loose monetary policy and expanding money supply indicate healthy financial markets. When monetary policy is tightened, as in 1994, the price of longer term assets like stocks and bonds fall as money and credit become scarcer. Another fundamental measure would be the dividend yield on stocks, the dividend divided by the stock price, both the absolute level and the relative level compared to bonds. From a historical standpoint, when the overall dividend yield on the stock market is below 2%, independent of other factors, this means that the stock market is expensive. When the dividend yield on stocks is low relative to bond yields, this means investors are willing to pay more for stocks relative to bonds than has generally been the case historically....
In reply to:
Market Timing Strategies
Posted by : Infy_fan_always
Technical Indicators
The technical indicators are based on "price" and "volume" movements and patterns. The technical analyst looks at the patterns and movements independently of their causes. It is patterns alone that tells the state of the market. For example, the analyst might see a "topping" pattern developing in the overall market or one of the important sectors from his charts. A "head and shoulders" formation would see the market index rise steeply, fall and then rise again. This would be a very "bearish" or negative signal pointing to a large and sudden drop in the market. The analyst might discern the depth of the fall from the length of the neck or relative height of the shoulders. Other technical indicators involve the "volume" statistics or trading activities of investors. A sudden drop in trading activity or a large differential between smaller and larger stocks would be an indication of a potentially large move, with the direction dependent on what "expert" investors are doing compared to individuals.
Tracked by: 0 Boarder
Technical Indicators
The technical indicators are based on "price" and "volume" movements and patterns. The technical analyst looks at the patterns and movements independently of their causes. It is patterns alone that tells the state of the market. For example, the analyst might see a "topping" pattern developing in the overall market or one of the important sectors from his charts. A "head and shoulders" formation would see the market index rise steeply, fall and then rise again. This would be a very "bearish" or negative signal pointing to a large and sudden drop in the market. The analyst might discern the depth of the fall from the length of the neck or relative height of the shoulders. Other technical indicators involve the "volume" statistics or trading activities of investors. A sudden drop in trading activity or a large differential between smaller and larger stocks would be an indication of a potentially large move, with the direction dependent on what "expert" investors are doing compared to individuals....
In reply to:
Market Timing Strategies
Posted by : Infy_fan_always
It was Issac Newton who in 1768, after being wiped out in one of the many stock market crashes of his era, said:
"I can calculate the motions of the heavenly bodies but not the movements of the stock market".
His lesson has been learned by most active investors since then. The pricing of long term financial assets like stocks or bonds involves all components of the human condition; fear, greed, optimism, pessimism, crowd psychology. Politics, economics, revolution, natural disaster, technology also have impact.
Vain attempts to divine the direction and outcomes of "the market" have involved astrology, superstition and the supernatural.
Academics have surrendered unconditionally. After quantitative techniques and supercomputers proved duds in predicting the financial future, the most highly educated and qualified financial researchers ran up the white flag of the "efficient market". In their rational world, everyone knows everything and it is only random chance that moves markets in a dice-throwing "stochastic process". Basically, they reasoned, no one could predict the market since there were so many smart people trying to do it. They then set about proving this, hopefully making their insulated lives easier since they would never have to stick their necks out with market predictions.
For most investors however, market timing is too attractive to let pass by. If one could participate in all the 25% up years in the stock market and pass by the -25% years in TBills with a modest 5% return, the rewards would be huge. Even capturing a little of this outperformance would lead to a superb performance compared to a "passive" or fully invested strategy.
A market timing strategy is conceptually easy to understand. Stay invested when the market is up or flat. Avoid the downturns. The market timer develops signals to identify what condition a market is in. An overvalued market is called "expensive", "overbought" or "overextended". A normal market is "fairly valued". An undervalued market is "cheap".
The market timer can use a variety of measures to judge the status of the market. These techniques are a combination of technical, fundamental and quantitative indicators and measures.
Tracked by: 0 Boarder
It was Issac Newton who in 1768, after being wiped out in one of the many stock market crashes of his era, said:
"I can calculate the motions of the heavenly bodies but not the movements of the stock market".
His lesson has been learned by most active investors since then. The pricing of long term financial assets like stocks or bonds involves all components of the human condition; fear, greed, optimism, pessimism, crowd psychology. Politics, economics, revolution, natural disaster, technology also have impact.
Vain attempts to divine the direction and outcomes of "the market" have involved astrology, superstition and the supernatural.
Academics have surrendered unconditionally. After quantitative techniques and supercomputers proved duds in predicting the financial future, the most highly educated and qualified financial researchers ran up the white flag of the "efficient market". In their rational world, everyone knows everything and it is only random chance that moves markets in a dice-throwing "stochastic process". Basically, they reasoned, no one could predict the market since there were so many smart people trying to do it. They then set about proving this, hopefully making their insulated lives easier since they would never have to stick their necks out with market predictions.
For most investors however, market timing is too attractive to let pass by. If one could participate in all the 25% up years in the stock market and pass by the -25% years in TBills with a modest 5% return, the rewards would be huge. Even capturing a little of this outperformance would lead to a superb performance compared to a "passive" or fully invested strategy.
A market timing strategy is conceptually easy to understand. Stay invested when the market is up or flat. Avoid the downturns. The market timer develops signals to identify what condition a market is in. An overvalued market is called "expensive", "overbought" or "overextended". A normal market is "fairly valued". An undervalued market is "cheap".
The market timer can use a variety of measures to judge the status of the market. These techniques are a combination of technical, fundamental and quantitative indicators and measures....
In reply to:
Market Timing Strategies
Posted by : Infy_fan_always
Market timing sounds easy. These strategies involve moving between risky assets, such as stocks or bonds, and less risky short term securities like Treasury Bills based on 'technical', 'fundamental' or 'quantitative' analyses. Reduced to its core proposition, market timing means 'buying low and selling high.' Identifying high or 'overvalued' versus low or 'undervalued' is the complicated thing. Since riskier assets usually have higher returns over longer periods, staying 'out of the market' or invested in less-risky short term securities can mean a considerable sacrifice of overall return.
Tracked by: 0 Boarder
Market timing sounds easy. These strategies involve moving between risky assets, such as stocks or bonds, and less risky short term securities like Treasury Bills based on 'technical', 'fundamental' or 'quantitative' analyses. Reduced to its core proposition, market timing means 'buying low and selling high.' Identifying high or 'overvalued' versus low or 'undervalued' is the complicated thing. Since riskier assets usually have higher returns over longer periods, staying 'out of the market' or invested in less-risky short term securities can mean a considerable sacrifice of overall return....
Tracked by: 0 Boarder
Use and Limitations of Financial Ratios
Attention should be given to the following issues when using financial ratios:
*
A reference point is needed. To to be meaningful, most ratios must be compared to historical values of the same firm, the firm's forecasts, or ratios of similar firms.
*
Most ratios by themselves are not highly meaningful. They should be viewed as indicators, with several of them combined to paint a picture of the firm's situation.
*
Year-end values may not be representative. Certain account balances that are used to calculate ratios may increase or decrease at the end of the accounting period because of seasonal factors. Such changes may distort the value of the ratio. Average values should be used when they are available.
*
Ratios are subject to the limitations of accounting methods. Different accounting choices may result in significantly different ratio values.
...
In reply to:
Financial Ratios
Posted by : Infy_fan_always
Dividend Policy Ratios
Dividend policy ratios provide insight into the dividend policy of the firm and the prospects for future growth. Two commonly used ratios are the dividend yield and payout ratio.
The dividend yield is defined as follows:
Dividend Yield =Dividends Per Share / Share Price
A high dividend yield does not necessarily translate into a high future rate of return. It is important to consider the prospects for continuing and increasing the dividend in the future. The dividend payout ratio is helpful in this regard, and is defined as follows:
Payout Ratio = Dividends Per Share / Earnings Per Share
Tracked by: 0 Boarder
Dividend Policy Ratios
Dividend policy ratios provide insight into the dividend policy of the firm and the prospects for future growth. Two commonly used ratios are the dividend yield and payout ratio.
The dividend yield is defined as follows:
Dividend Yield =Dividends Per Share / Share Price
A high dividend yield does not necessarily translate into a high future rate of return. It is important to consider the prospects for continuing and increasing the dividend in the future. The dividend payout ratio is helpful in this regard, and is defined as follows:
Payout Ratio = Dividends Per Share / Earnings Per Share...
In reply to:
Financial Ratios
Posted by : Infy_fan_always
Profitability Ratios
Profitability ratios offer several different measures of the success of the firm at generating profits.
The gross profit margin is a measure of the gross profit earned on sales. The gross profit margin considers the firm's cost of goods sold, but does not include other costs. It is defined as follows:
Gross Profit Margin = (Sales - Cost of Goods Sold) / Sales
Return on assets is a measure of how effectively the firm's assets are being used to generate profits. It is defined as:
Return on Assets = Net Income / Total Assets
Return on equity is the bottom line measure for the shareholders, measuring the profits earned for each dollar invested in the firm's stock. Return on equity is defined as follows:
Return on Equity = Net Income / Shareholder Equity
Tracked by: 0 Boarder
Profitability Ratios
Profitability ratios offer several different measures of the success of the firm at generating profits.
The gross profit margin is a measure of the gross profit earned on sales. The gross profit margin considers the firm's cost of goods sold, but does not include other costs. It is defined as follows:
Gross Profit Margin = (Sales - Cost of Goods Sold) / Sales
Return on assets is a measure of how effectively the firm's assets are being used to generate profits. It is defined as:
Return on Assets = Net Income / Total Assets
Return on equity is the bottom line measure for the shareholders, measuring the profits earned for each dollar invested in the firm's stock. Return on equity is defined as follows:
Return on Equity = Net Income / Shareholder Equity...
In reply to:
Financial Ratios
Posted by : Infy_fan_always
Financial Leverage Ratios
Financial leverage ratios provide an indication of the long-term solvency of the firm. Unlike liquidity ratios that are concerned with short-term assets and liabilities, financial leverage ratios measure the extent to which the firm is using long term debt.
The debt ratio is defined as total debt divided by total assets:
Debt Ratio = Total Debt / Total Assets
The debt-to-equity ratio is total debt divided by total equity:
Debt-to-Equity Ratio = Total Debt / Total Equity
Debt ratios depend on the classification of long-term leases and on the classification of some items as long-term debt or equity.
The times interest earned ratio indicates how well the firm's earnings can cover the interest payments on its debt. This ratio also is known as the interest coverage and is calculated as follows:
Interest Coverage = EBIT / Interest Charges
where EBIT = Earnings Before Interest and Taxes
Tracked by: 0 Boarder
Financial Leverage Ratios
Financial leverage ratios provide an indication of the long-term solvency of the firm. Unlike liquidity ratios that are concerned with short-term assets and liabilities, financial leverage ratios measure the extent to which the firm is using long term debt.
The debt ratio is defined as total debt divided by total assets:
Debt Ratio = Total Debt / Total Assets
The debt-to-equity ratio is total debt divided by total equity:
Debt-to-Equity Ratio = Total Debt / Total Equity
Debt ratios depend on the classification of long-term leases and on the classification of some items as long-term debt or equity.
The times interest earned ratio indicates how well the firm's earnings can cover the interest payments on its debt. This ratio also is known as the interest coverage and is calculated as follows:
Interest Coverage = EBIT / Interest Charges
where EBIT = Earnings Before Interest and Taxes...
In reply to:
Financial Ratios
Posted by : Infy_fan_always
Asset Turnover Ratios
Asset turnover ratios indicate of how efficiently the firm utilizes its assets. They sometimes are referred to as efficiency ratios, asset utilization ratios, or asset management ratios. Two commonly used asset turnover ratios are receivables turnover and inventory turnover.
Receivables turnover is an indication of how quickly the firm collects its accounts receivables and is defined as follows:
Receivables Turnover = Annual Credit Sales / Accounts Receivable
The receivables turnover often is reported in terms of the number of days that credit sales remain in accounts receivable before they are collected. This number is known as the collection period. It is the accounts receivable balance divided by the average daily credit sales, calculated as follows:
Average Collection Period = Accounts Receivable / (Annual Credit Sales / 365)
The collection period also can be written as:
Average Collection Period = 365 / Receivables Turnover
Another major asset turnover ratio is inventory turnover. It is the cost of goods sold in a time period divided by the average inventory level during that period:
Inventory Turnover = Cost of Goods Sold / Average Inventory
The inventory turnover often is reported as the inventory period, which is the number of days worth of inventory on hand, calculated by dividing the inventory by the average daily cost of goods sold:
Inventory Period = Average Inventory / (Annual Cost of Goods Sold / 365)
The inventory period also can be written as:
Inventory Period = 365 / Inventory Turnover
Other asset turnover ratios include fixed asset turnover and total asset turnover.
Tracked by: 0 Boarder
Asset Turnover Ratios
Asset turnover ratios indicate of how efficiently the firm utilizes its assets. They sometimes are referred to as efficiency ratios, asset utilization ratios, or asset management ratios. Two commonly used asset turnover ratios are receivables turnover and inventory turnover.
Receivables turnover is an indication of how quickly the firm collects its accounts receivables and is defined as follows:
Receivables Turnover = Annual Credit Sales / Accounts Receivable
The receivables turnover often is reported in terms of the number of days that credit sales remain in accounts receivable before they are collected. This number is known as the collection period. It is the accounts receivable balance divided by the average daily credit sales, calculated as follows:
Average Collection Period = Accounts Receivable / (Annual Credit Sales / 365)
The collection period also can be written as:
Average Collection Period = 365 / Receivables Turnover
Another major asset turnover ratio is inventory turnover. It is the cost of goods sold in a time period divided by the average inventory level during that period:
Inventory Turnover = Cost of Goods Sold / Average Inventory
The inventory turnover often is reported as the inventory period, which is the number of days worth of inventory on hand, calculated by dividing the inventory by the average daily cost of goods sold:
Inventory Period = Average Inventory / (Annual Cost of Goods Sold / 365)
The inventory period also can be written as:
Inventory Period = 365 / Inventory Turnover
Other asset turnover ratios include fixed asset turnover and total asset turnover....
In reply to:
Financial Ratios
Posted by : Infy_fan_always
Liquidity Ratios
Liquidity ratios provide information about a firm's ability to meet its short-term financial obligations. They are of particular interest to those extending short-term credit to the firm. Two frequently-used liquidity ratios are the current ratio (or working capital ratio) and the quick ratio.
The current ratio is the ratio of current assets to current liabilities:
Current Ratio = Current Assets / Current Liabilities
Short-term creditors prefer a high current ratio since it reduces their risk. Shareholders may prefer a lower current ratio so that more of the firm's assets are working to grow the business. Typical values for the current ratio vary by firm and industry. For example, firms in cyclical industries may maintain a higher current ratio in order to remain solvent during downturns.
One drawback of the current ratio is that inventory may include many items that are difficult to liquidate quickly and that have uncertain liquidation values. The quick ratio is an alternative measure of liquidity that does not include inventory in the current assets. The quick ratio is defined as follows:
Quick Ratio = (Current Assets - Inventory) / Current Liabilities
The current assets used in the quick ratio are cash, accounts receivable, and notes receivable. These assets essentially are current assets less inventory. The quick ratio often is referred to as the acid test.
Finally, the cash ratio is the most conservative liquidity ratio. It excludes all current assets except the most liquid: cash and cash equivalents. The cash ratio is defined as follows:
Cash Ratio = (Cash + Marketable Securities) \ Current Liabilities
The cash ratio is an indication of the firm's ability to pay off its current liabilities if for some reason immediate payment were demanded.
Tracked by: 0 Boarder
Liquidity Ratios
Liquidity ratios provide information about a firm's ability to meet its short-term financial obligations. They are of particular interest to those extending short-term credit to the firm. Two frequently-used liquidity ratios are the current ratio (or working capital ratio) and the quick ratio.
The current ratio is the ratio of current assets to current liabilities:
Current Ratio = Current Assets / Current Liabilities
Short-term creditors prefer a high current ratio since it reduces their risk. Shareholders may prefer a lower current ratio so that more of the firm's assets are working to grow the business. Typical values for the current ratio vary by firm and industry. For example, firms in cyclical industries may maintain a higher current ratio in order to remain solvent during downturns.
One drawback of the current ratio is that inventory may include many items that are difficult to liquidate quickly and that have uncertain liquidation values. The quick ratio is an alternative measure of liquidity that does not include inventory in the current assets. The quick ratio is defined as follows:
Quick Ratio = (Current Assets - Inventory) / Current Liabilities
The current assets used in the quick ratio are cash, accounts receivable, and notes receivable. These assets essentially are current assets less inventory. The quick ratio often is referred to as the acid test.
Finally, the cash ratio is the most conservative liquidity ratio. It excludes all current assets except the most liquid: cash and cash equivalents. The cash ratio is defined as follows:
Cash Ratio = (Cash + Marketable Securities) \ Current Liabilities
The cash ratio is an indication of the firm's ability to pay off its current liabilities if for some reason immediate payment were demanded.
...
In reply to:
Financial Ratios
Posted by : Infy_fan_always
Liquidity Ratios
Liquidity ratios provide information about a firm's ability to meet its short-term financial obligations. They are of particular interest to those extending short-term credit to the firm. Two frequently-used liquidity ratios are the current ratio (or working capital ratio) and the quick ratio.
The current ratio is the ratio of current assets to current liabilities:
Current Ratio = Current Assets / Current Liabilities
Short-term creditors prefer a high current ratio since it reduces their risk. Shareholders may prefer a lower current ratio so that more of the firm's assets are working to grow the business. Typical values for the current ratio vary by firm and industry. For example, firms in cyclical industries may maintain a higher current ratio in order to remain solvent during downturns.
One drawback of the current ratio is that inventory may include many items that are difficult to liquidate quickly and that have uncertain liquidation values. The quick ratio is an alternative measure of liquidity that does not include inventory in the current assets. The quick ratio is defined as follows:
Quick Ratio = (Current Assets - Inventory) / Current Liabilities
The current assets used in the quick ratio are cash, accounts receivable, and notes receivable. These assets essentially are current assets less inventory. The quick ratio often is referred to as the acid test.
Finally, the cash ratio is the most conservative liquidity ratio. It excludes all current assets except the most liquid: cash and cash equivalents. The cash ratio is defined as follows:
Cash Ratio = (Cash + Marketable Securities) \ Current Liabilities
The cash ratio is an indication of the firm's ability to pay off its current liabilities if for some reason immediate payment were demanded.
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