Definition
The Acid Test Ratio, also called the Quick Ratio, is a financial metric that shows whether a company can pay its short-term debts using its most liquid assets. It looks at assets that can quickly be converted into cash, such as cash, bank balances, and receivables, while excluding inventory.
Example
If a company has 100,000 in quick assets (cash and receivables) and 50,000 in short-term liabilities, the acid test ratio would be 2:1. This means the company has twice the liquid assets needed to cover its short-term obligations.
Caution
While the acid test ratio helps measure a company's short-term financial strength, it should be used along with other financial ratios and an assessment of the company's overall financial health before making investment or business decisions.