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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.