Why a Quick Ratio might be Considered the best Financial Ratio in Real Estate at this Time – Lee Chandler

 

 

 

If you are an investor in real estate, you absolutely must understand and know the quick ratio to be able to be successful in buying and acquiring properties. The quick ratio analyzes the liquidity of an asset or in layman’s terms how easily the property can cover its short-term debt obligations. The formula is basic enough, Quick Ratio = (Current Assets – Inventory) / Current Liabilities which can easily be calculated using the balance sheet for properties. Taking away inventory might seem counterintuitive as inventory is generally considered an asset but, in this ratio,, it assumes that it will take many weeks or months to sell all your inventory which means inventory is not considered short term. During these unprecedented times, we are living in many small businesses, and properties have gone under or been foreclosed on because of their inability to be able to successfully pay their debts or liabilities in times. When analyzing a deal today it is crucial that the property be able to cover its short term debt obligations as Covid-19 spreads and more people are unemployed which can result in an unforeseen higher than average vacancy rate. Normally, investors like to see the ratio at least at 1 as that signifies that the assets can cover the liabilities but most like to see a ratio of 2-1 as the acceptable benchmark. Also, it is helpful to keep in mind that most creditors will prefer a higher quick ratio as it reduces their overall risk associated with lending money especially with many people nowadays faulting on their loans. This ratio, in a nutshell, is a must to look at when acquiring properties and making sure your investment is not “cash poor”.

By admin

Leave a Reply

Your email address will not be published. Required fields are marked *