Acid Testing

Acid testing, also known as the quick ratio, is a financial measure that assesses a company's ability to meet its short-term obligations using its most liquid assets. It is calculated by taking cash, marketable securities, and accounts receivable, then dividing that total by current liabilities. This ratio excludes inventory, which may not be quickly convertible to cash. A higher acid test ratio indicates better liquidity and financial health, meaning the company can more readily cover its immediate debts without relying on selling inventory or other less liquid assets.