Acid-test ratio is also known as the quick ratio, but that name is far less interesting. The ratio measures the overall liquidity of a company by determining how well-owned assets could cover current liabilities. If you have to liquidate some assets (like you would dissolve something in acid), how much will the liquidation yield cover?
- It is important to note that this ratio should only test assets that can be converted into cash within 90 days or less.
- The actual formula is as follows: Cash + Accounts Receivable + Short Term Investments / Current Liabilities = Acid-Test Ratio)
- Now most companies are interested in something other than having to process the reality that the ratio tests. And while liquidating your various assets, you may remember the test negatively.