A liquidity ratio that expresses the ability of a company to meet its current obligations. It is a measure of a company’s liquidity and by extension its ability to settle its current debts (i.e., short-term obligations, or those that fall due within a year).
Acid test ratio is calculated by dividing the company’s total liquid assets (i.e., its current assets, net of inventories) by its total liabilities (i.e., its current liabilities):
Acid test ratio = (current assets – inventories) / current liabilities
In other words, it is calculated by dividing the total amount of a company’s cash, cash equivalents and marketable securities by its total current liabilities.
It’s also known as the quick ratio.
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