Ratio Analysis
Acid Test (Quick 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 similar but a more
strenuous version of the "working capital" ratio,
indicating whether liabilities could be paid without selling
inventory.
| Things to remember |
- This is an extreme version of the working capital ratio because it only uses cash and
equivalents.
- The ratio excludes inventory,
which for some companies can make up a large portion
of its assets.
|
[Click on the button above to see the financial statement] |
| For Cory's Tequila Co. |
| $827+$1189+$1242 |
=
1.08 |
| $3,003 |
Acid Test Analysis:
This ratio is used to determine risk that is not detected by
the working capital ratio. Cory's Tequila Co. seems to be all
right in this area. Their ratio of 1.08 means that they have
just enough liquid assets to cover a unexpected drawdown of
liabilities (people wanting their money immediately). Companies with
ratios of less than 1 cannot pay their current liabilities and should be looked at with extreme
caution. Furthermore if the acid ratio is much lower than the working
capital ratio it means that current assets are highly dependent
on inventory - retail stores are examples of this type of business.
|
Previous
