Beginning Investor Terms – Quick Ratio or Acid Test
Posted on | January 20, 2010 | No Comments
The Quick Ratio, also known affectionately as the “Acid Test” is a metric used to measure short term solvency. In non jargon it is a formula used to figure out whether or not a company can meet its short term obligations. If a company fails the test, it would be wise to watch.
Here is the math, The Acid Test = (Current Assets-Inventory)/Current Liabilities. Should be greater than 1, although like any metric, it can vary from industry to industry.
To provide a comparison the Current Ratio = Current Assets/Current Liabilities. Should be greater than 1.5
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