AKA: The Quick Ratio.
"Quick! How liquid are we?" The acid test, or quick ratio, is a measure of how well (or not-so-well) a company is positioned to be able to quickly pay off the bills it owes, i.e. its liabilities.
Why the quickly in there? Because the assets used to pay off the liabilities need to be quickly available assets, like cash or bank CDs or publicly traded stocks or bills the company will collect in the next 90 days or so. The company likely owns other assets, like a tractor-smelting company, but like…is it really going to sell that smelter to then pay off its bill to U.S. Steel for, uh.. steel?
Ok…the actual ratio looks like this:
(Cash + sellable securities + money people owe the company) / (liabilities)
So basically, the Quick Ratio compares your total liquid assets to how much you owe. It's important to note that you don't count your current inventory as part of your assets, as it's typically hard to sell everything you have right this moment, and then not at a big discount. The higher the quick ratio, the healthier the liquidity position.
Another good way to test your liquidity? Stand in front of a radiator and see how quickly you evaporate.
Related or Semi-related Video
Finance: What is the Acid Test Ratio/Qui...14 Views
finance a la shmoop - what is the acid test ratio or the quick ratio quick how
liquid are we now the quick ratio is a measure of how well or not so well a [Water coming out of a tap]
company is positioned to be able to quickly pay off the bills that it owes
aka its liabilities... why the quickly in there because the assets used to pay off
the liabilities need to be quickly available assets like cash or bank CD's
or publicly traded stocks or bills the company will collect the next ninety [Assets appear]
days or so from people likely to pay them well the company likely owns other
assets like a tractor smelting company but like is it really gonna sell that [Internet mouse cursor clicks search bar]
smelter to then pay off its bill to U.S steel for steel....Ok well the actual ratio
looks like this cash plus sellable securities plus money people owe the
company divided by liabilities so basically the quick ratio compares your
total liquid assets to how much you owe and it's important to note that you [Forklift drops inventory on factory floor]
don't count your current inventory as part of your assets as it's typically
hard to sell everything you have right at this moment and then not at some huge
discount the higher the quick ratio the healthier the liquidity position of the
company another good way to test your liquidity well stand in front of a [Man showering]
radiator and see how quickly you evaporate [Girl stood by a radiator and begins to melt]
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