Acid Test Ratio

The Acid Test Ratio, also known as the quick ratio, measures a company’s ability to cover current liabilities with its most liquid short-term assets. It’s calculated as: (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities. A higher ratio indicates stronger financial health and capacity to manage debt without relying on inventory sales. Unlike the current ratio, it excludes less liquid assets, offering a stricter view of liquidity. A ratio above 1 suggests a firm can meet obligations comfortably, while below 1 signals potential liquidity issues.