This refers to a financial metric that is used to measure the ability of a firm to meet its various short-term obligations. It is calculated by dividing the sum of a firm’s most liquid assets like cash and short-term receivables by its short-term liabilities. Other short-term assets like inventory, which are not readily convertible into cash, are usually not included in the calculation of this ratio. The acid-test ratio is used by analysts as an important measure of a firm’s liquidity position. There is considerable leeway involved in the calculation of the ratio since analysts may differ in their opinion about the actual liquidity of a firm’s various assets.
