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Trading and Investment Terminology

Acid-Test Ratio

It is also known as the Quick Ratio.

The quick ratio uses only the most liquid current assets that can be converted to cash within 90 days or less. 

In the best-case scenario, a company should have a ratio of 1 or more, suggesting the company has enough cash to pay its bills.

Formula:

Acid-test ration= Cash & Cash Equivalents + Marketable Securities + Account Receivables / Current Liabilities

Items can be found on the Company's Balance sheet

  • Cash and cash equivalents are the most liquid current assets on a company’s balance sheet, such as savings accounts, a term deposit with a maturity of fewer than 3 months, and T-bills.
  • Marketable securities are liquid financial instruments that can be readily converted into cash.
  • Accounts receivables are the money owed to the company from providing customers with goods and/or services.
  • Current liabilities are debts or obligations due within one year.

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