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Quick or acid test ratio calculator
The quick ratio, sometimes called the acid test ratio, is similar to the current ratio, but is considered a more reliable indicator of a company's ability to meet its short-term financial obligations. Because inventory can sometimes be difficult to liquidate, this ratio deducts inventory from your assets before computing the ratio. Potential creditors like to use this ratio because it reveals a company's ability to pay off under the worst possible conditions.
The formula: Current assets minus inventories, divided by current liabilities
Now you know where you stand and have a basis for comparison with previous years. A quick ratio of 1.0:1 means you have a dollar's worth of easily convertible assets for each dollar of your current liabilities. Though acceptable ratios can vary from industry to industry, a ratio of 1.0:1 is generally acceptable to most creditors. Comparing today's quick ratio to quick ratios calculated from previous financial statements can give you a hint of developing trends in your company. While changes in ratios don't automatically spell trouble, uncovering the reasons for changes can help you find ways to nip potential problems in the bud.