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The "acid-test ratio," often referred to as the "quick ratio," is a financial indicator used to assess a company's capacity to settle its immediate liabilities using its most liquid assets. A company's liquid assets divided by its current liabilities are used to compute the acid-test ratio. The formula for the acid-test ratio can be expressed as:
Acid-Test Ratio = (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities
The acid-test ratio serves as a gauge of a company's liquidity, specifically its capacity to make timely payments on its short-term debts. Accounts receivable is the amount that a firm might anticipate receiving from its customers soon, whereas liquid assets, such as cash and marketable securities, are thought to be the most easily accessible sources of funds for a corporation.
In general, a high acid-test ratio is regarded as a sign of a company's sound financial condition since it indicates that the company has sufficient liquid assets to meet its short-term obligations without having to liquidate its long-term assets. On the other side, a low acid-test ratio could mean that a business has cash flow issues and may find it difficult to pay its short-term obligations.
