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Finance: What is the Acid Test Ratio/Quick Ratio? 14 Views


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What is the Acid Test Ratio/Quick Ratio? The Acid Test Ratio is used to determine if a company can cover their liabilities in the short-term. It only uses liquid assets in its calculation because of the short-term nature. To find the acid test, or quick ratio, all current assets are divided by current liabilities.

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Transcript

00:00

finance a la shmoop - what is the acid test ratio or the quick ratio quick how

00:08

liquid are we now the quick ratio is a measure of how well or not so well a [Water coming out of a tap]

00:13

company is positioned to be able to quickly pay off the bills that it owes

00:17

aka its liabilities... why the quickly in there because the assets used to pay off

00:24

the liabilities need to be quickly available assets like cash or bank CD's

00:29

or publicly traded stocks or bills the company will collect the next ninety [Assets appear]

00:35

days or so from people likely to pay them well the company likely owns other

00:39

assets like a tractor smelting company but like is it really gonna sell that [Internet mouse cursor clicks search bar]

00:44

smelter to then pay off its bill to U.S steel for steel....Ok well the actual ratio

00:50

looks like this cash plus sellable securities plus money people owe the

00:55

company divided by liabilities so basically the quick ratio compares your

01:00

total liquid assets to how much you owe and it's important to note that you [Forklift drops inventory on factory floor]

01:04

don't count your current inventory as part of your assets as it's typically

01:09

hard to sell everything you have right at this moment and then not at some huge

01:14

discount the higher the quick ratio the healthier the liquidity position of the

01:18

company another good way to test your liquidity well stand in front of a [Man showering]

01:22

radiator and see how quickly you evaporate [Girl stood by a radiator and begins to melt]

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