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.
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.