Definition

The acid-test ratio, also known as the quick ratio, is a measure of a company’s liquidity. It is calculated by dividing the sum of a company’s cash, marketable securities, and accounts receivable by its current liabilities. The acid-test ratio is used to measure a company’s ability to pay its short-term obligations without having to sell its inventory.

 

Importance

The acid-test ratio is an important measure of a company’s financial health. It is used to assess a company’s ability to pay its short-term obligations without having to sell its inventory. A low acid-test ratio indicates that a company may not be able to meet its short-term obligations and may be at risk of defaulting on its debt. A high acid-test ratio, on the other hand, indicates that a company is in a strong financial position and is able to meet its short-term obligations.

 

Example

For example, let’s assume that Company A has the following assets and liabilities: