acid-test ratio

Definition

The ratio of current assets less inventories to total current liabilities. This ratio is the most stringent measure of how well the company is covering its short-term obligations, since the ratio only considers that part of current assets which can be turned into cash immediately (thus the exclusion of inventories). The ratio tells creditors how much of the company's short term debt can be met by selling all the company's liquid assets at very short notice. also called acid-test ratio.

Use acid-test ratio in a sentence

You should always make sure that you know where you stand with an acid-test ratio and use it to improve.

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The acid-test ratio was important and would give us information that we needed to know for the near and immediate future.

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If a company is having difficulty collecting on accounts receivable, but still needs to pay it's current liabilities, its insolubility can be demonstrated via the acid-test ratio.

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current cash debt coverage ratio quick ratio