A firm has a higher quick (or acid test) ratio than the industry average, which implies:

Question

BlackTom AI · Accepted Answer

Let's unpack what a high quick (acid test) ratio signals about a firm. It measures the ability to cover immediate liabilities with the most liquid assets, excluding inventory. A ratio higher than the industry average suggests stronger short-term liquidity relative to peers.

Option 1: 'the firm has a higher P/E ratio than other firms in the industry, only.' The quick ratio tells us about liquidity, not about market valuation metrics like the price-to-earnings ratio. Therefore this option introduces an unrelated claim about P/E and is not implied by liquidity alone.

Option 2: 'the firm is more likely to avoid insolvency in the short run than other firms in the industry, only.' This aligns with the interpretation of a higher quick ratio: better ability to meet short-term obligations, reducing the risk of insolvency in the near term. The word 'only' confines the statement to liquidity implications, which is consistent with what the quick ratio conveys.

Option 3: 'the firm has a higher P/E ratio than other firms in the industry, and the firm is more likely to avoid insolvency in the short run than other firms in the industry.' While the second part is a plausible consequence of a strong quick ratio, the first part about a higher P/E ratio is not a direct or guaranteed consequence of liquidity measures. Market valuation ratios like P/E depend on earnings, growth expectations, and investor sentiment, not solely on liquidity.

Option 4: 'the firm is more likely to avoid insolvency in the short run than other firms in the industry, and the firm may be less profitable than other firms in the industry.' The first clause is correct about liquidity, but the second clause introduces a potential negative implication about profitability, which is not a necessary consequence of a high quick ratio. A firm could have strong liquidity yet be less profitable due to low margins or other factors; however, profitability is not directly determined by the quick ratio itself.

In summary, the quick ratio primarily informs short-term solvency relative to peers. It does not dictate market valuation or profitability outcomes, and statements tying it to those metrics without additional information are not warranted.

A firm has a higher quick (or acid test) ratio than the industry average, which implies:

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