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Acid Test Ratio Meaning

The acid test ratio, also known as the quick ratio, is a liquidity metric that measures a company’s ability to meet its short-term obligations using only its most liquid assets. It compares “quick” assets-cash, cash equivalents, marketable securities, and receivables-to current liabilities, excluding inventory and other assets that may be harder to convert quickly into cash. The standard formula is:

Acid test ratio = (Current assets − Inventory) ÷ Current liabilities A ratio above 1.0 indicates that a company has more quick assets than short-term liabilities, suggesting it could cover its immediate obligations without relying on additional financing or selling inventory.

A ratio below 1.0 can be a signal that the firm may face liquidity pressure if it cannot access external funding or accelerate cash inflows. While a higher ratio is generally seen as positive, an excessively high figure can indicate underutilized cash or overly conservative working capital management.

Conversely, a very low ratio may suggest aggressive leverage or weak liquidity. Interpretation should always be made in context, taking into account the industry, business model, and seasonality.

Stakeholders such as lenders, suppliers, and investors use the acid test ratio as a conservative indicator of short-term financial health. It complements other metrics like the current ratio and operating cash flow, offering a focused view on how quickly a company could meet obligations without selling inventory or fixed assets.

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Finery Markets BVI Limited (“Finery Markets”) provides software, technology infrastructure, and related Information and Communication Technology (ICT) services on a Software-as-a-Service (“SaaS”) basis. Finery Markets acts solely as a software vendor and does not operate a trading platform, does not intermediate, match, execute, clear, or settle transactions, and does not engage in any activities that would require regulatory authorisation under applicable laws.

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