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What is the acid-test ratio?

The acid-test ratio, also known as the quick ratio, is a financial metric used to assess a company’s short-term liquidity and ability to meet its immediate obligations. It measures a company’s ability to pay off its current liabilities using its most liquid assets.

The acid-test ratio is calculated by dividing a company’s quick assets (cash, marketable securities, and accounts receivable) by its current liabilities.

It provides a more stringent measure of liquidity than the current ratio, as it excludes inventory, which may not be easily converted into cash. A higher acid-test ratio indicates a stronger ability to meet short-term obligations.