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Finance: What is the Acid Test Ratio/Quick Ratio? 14 Views
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What is the Acid Test Ratio/Quick Ratio? The Acid Test Ratio is used to determine if a company can cover their liabilities in the short-term. It only uses liquid assets in its calculation because of the short-term nature. To find the acid test, or quick ratio, all current assets are divided by current liabilities.
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Transcript
- 00:00
finance a la shmoop - what is the acid test ratio or the quick ratio quick how
- 00:08
liquid are we now the quick ratio is a measure of how well or not so well a [Water coming out of a tap]
- 00:13
company is positioned to be able to quickly pay off the bills that it owes
- 00:17
aka its liabilities... why the quickly in there because the assets used to pay off
- 00:24
the liabilities need to be quickly available assets like cash or bank CD's
Full Transcript
- 00:29
or publicly traded stocks or bills the company will collect the next ninety [Assets appear]
- 00:35
days or so from people likely to pay them well the company likely owns other
- 00:39
assets like a tractor smelting company but like is it really gonna sell that [Internet mouse cursor clicks search bar]
- 00:44
smelter to then pay off its bill to U.S steel for steel....Ok well the actual ratio
- 00:50
looks like this cash plus sellable securities plus money people owe the
- 00:55
company divided by liabilities so basically the quick ratio compares your
- 01:00
total liquid assets to how much you owe and it's important to note that you [Forklift drops inventory on factory floor]
- 01:04
don't count your current inventory as part of your assets as it's typically
- 01:09
hard to sell everything you have right at this moment and then not at some huge
- 01:14
discount the higher the quick ratio the healthier the liquidity position of the
- 01:18
company another good way to test your liquidity well stand in front of a [Man showering]
- 01:22
radiator and see how quickly you evaporate [Girl stood by a radiator and begins to melt]
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