acid-test ratio

Discipline: Economics

Acid-Test Ratio, also known as quick ratio, is an indicator of liquidity. It predicts the ability of a firm to pay its current debts with its relatively more liquid assets.

Acid-Test Ratio equals to: Cash + Marketable Securities + Accounts Receivable / Current Liabilities. Financial analysts usually expect this ratio to be above 1, but the acid-test ratio of the firm also has to be compared to that of the other firms in the same industry.

The higher the acid-test ratio, the better it is for the financial health of the firm, since relatively higher current assets (or relatively lower current liabilities) imply lower levels of risk.

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