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:
- Cash: $10,000
- Marketable Securities: $20,000
- Accounts Receivable: $30,000
- Current Liabilities: $50,000
- The acid-test ratio for Company A would be calculated as follows:
- Acid-Test Ratio = ($10,000 + $20,000 + $30,000) / $50,000
- Acid-Test Ratio = 0.8
