ability to pay current liabilities. In contrast, Lincoln Company has cash and current as-
sets (marketable securities and accounts receivable) that can generally be converted to
cash rather quickly to meet its current liabilities.
A ratio that measures the “instant” debt-paying ability of a company is called the
quick ratiooracid-test ratio. It is the ratio of the total quick assets to the total current
liabilities.Quick assetsare cash and other current assets that can be quickly converted
to cash. Quick assets normally include cash, marketable securities, and receivables. The
quick ratios for Lincoln Company and Jefferson Corporation are 1.3 ($280,500 ÷
$210,000) and 0.76 ($160,500 ÷ $210,000), respectively. Quick ratios exceeding 1.0 are
generally considered good.
The quick ratios for Pixar and DreamWorks are as follows:Pixar’s quick ratio (17.06) is stronger than DreamWorks’ (2.95). The difference between
the two quick ratios is caused by Pixar’s strong temporary investment balance at 64.8%
($826.1 ÷ $1,275.0) of total assets, while DreamWorks has no temporary investments.
DreamWorks’ quick ratio is still not so small as to be of concern. DreamWorks’ quick
ratio is still above 1.0, which indicates a strong liquidity position. DreamWorks is a
strong company and would be able to obtain cash easily through short-term borrow-
ing if necessary.Ratio of Fixed Assets to Long-Term Liabilities
Long-term notes and bonds are often secured by mortgages on fixed assets. The ratio
of fixed assets to long-term liabilitiesis a leverage measure that indicates the margin
of safety of the noteholders or bondholders. It also indicates the ability of the business
to borrow additional funds on a long-term basis. The ratio of fixed assets to long-term
liabilities for Pixar and DreamWorks is as follows:The ratio of fixed assets to long-term liabilities is not applicable (NA) to Pixar, because
it has no long-term debt. Thus, Pixar has long-term debt borrowing capacity available
if the need arises. In contrast, DreamWorks’ ratio of long-term debt to fixed assets is
0.41, indicating safety of only 41 cents of fixed assets for each dollar of long-term debt.
This ratio shows the difference in leverage between the two companies. Pixar is not us-
ing long-term debt, while DreamWorks is using long-term debt more aggressively.648 Chapter 14 Financial Statement Analysis
Pixar DreamWorks
(in millions, (in millions,
except ratio) except ratio)
Quick assets:
Cash $ 28.70 $ 63.10
Temporary investments 826.10 0.00
Accounts receivable (net) 82.00 387.80
a. Total quick assets $936.80 $450.90
b. Current liabilities ÷ $ 54.90 ÷ $152.90
Quick ratio (a ÷ b) 17.06 2.95Pixar DreamWorks
(in millions, (in millions,
except ratio) except ratio)
Fixed assets (net) $125.60 $ 89.70
Long-term liabilities ÷$ 0 ÷$217.20
Ratio of fixed assets to long-term liabilities NA 0.41