AKA: The Quick Ratio.
"Quick! How liquid are we?" The acid test, or quick ratio, is a measure of how well (or not-so-well) a company is positioned to be able to quickly pay off the bills it owes, i.e. its liabilities.
Why the quickly in there? Because the assets used to pay off the liabilities need to be quickly available assets, like cash or bank CDs or publicly traded stocks or bills the company will collect in the next 90 days or so. The company likely owns other assets, like a tractor-smelting company, but like…is it really going to sell that smelter to then pay off its bill to U.S. Steel for, uh.. steel?
Ok…the actual ratio looks like this:
(Cash + sellable securities + money people owe the company) / (liabilities)
So basically, the Quick Ratio compares your total liquid assets to how much you owe. It's important to note that you don't count your current inventory as part of your assets, as it's typically hard to sell everything you have right this moment, and then not at a big discount. The higher the quick ratio, the healthier the liquidity position.
Another good way to test your liquidity? Stand in front of a radiator and see how quickly you evaporate.
Related or Semi-related Video
Finance: What is a Consolidated Balance ...3 Views
Finance a la shmoop what is a consolidated balance sheet? okay people
this is a tale of two balance sheets it was the best of times right here and all [Lemonade stand balance sheet appears]
that cash no debt,, yeah and it was the worst of times and pretty much the
opposite and then one magical mergy day the two companies possessing these
two divergent balance sheets decided to you know merge it was a lovely ceremony [Bride and groom holding hands]
the bride wore white the groom stepped on the glass so then the balance sheets
were consolidated that is they were merged or combined or fully brought
together liabilities plus liabilities assets plus assets so the few dollars in
cash here in the worst of times balance sheet
well that was tacked on to the cash in the best of times balance sheet and the
same happened with long term liabilities and short and eventually after the
wedding night was you know consummated these two balance sheets had merged and [Man and girl standing by their lemonade stands]
consolidated and looked like this and that's what happens when companies merge
everything including their balance sheets consolidate let's hope they
generate lots of tiny cash flows and credits in the future....Mazel Tov
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