Meaning
This ratio is crucial for assessing a company’s immediate financial health and short-term solvency.Definition
The Acid Test Ratio, also known as the Quick Ratio, measures a company’s ability to cover its short-term liabilities with its most liquid assets, excluding inventory. It’s a stringent test of liquidity.Formula
Formula: (Cash + Marketable Securities + Accounts Receivable) / Current LiabilitiesSignificance
It helps stakeholders understand a firm’s capacity to meet urgent obligations without relying on inventory sales. A higher ratio generally indicates a stronger, more liquid financial position.Author
