The acid-test ratio, also known as the quick ratio, assesses a company’s ability to meet its short-term obligations with its most liquid assets. The calculation involves dividing the sum of a company’s cash, marketable securities, and accounts receivable by its current liabilities. For instance, if a company has $50,000 in cash, $25,000 in marketable securities, $35,000 in accounts receivable, and $75,000 in current liabilities, the ratio is calculated as ($50,000 + $25,000 + $35,000) / $75,000 = 1.47.
This metric provides a more stringent measure of liquidity than the current ratio because it excludes inventory and other current assets that may be difficult to quickly convert into cash. It serves as a crucial indicator for creditors and investors seeking to understand a company’s immediate solvency. Historically, this type of ratio gained prominence during economic downturns when the rapid conversion of assets to cash became paramount for business survival.