| Acid-Test
Ratio |
 |
|
=
|
(Cash
+ Accounts Receivable + Short-term Investments)
|
|
|
|
Current
Liabilities
|
A stringent test that indicates if a firm has enough short-term assets
(without selling inventory) to cover its immediate liabilities. It
is a similar, but more strenuous version of the working capital ratio,
(indicating whether liabilities can be paid without selling inventory).
|
 |
Companies
with ratios of less than 1 cannot pay their current liabilities and
should be looked at with extreme care. Furthermore, if the acid test
ratio is much lower than the working capital ratio, it means current
assets are highly dependent on inventory. Retail stores are examples
of this type of business.
|
|
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Dictionary
