What is the acid-test ratio used to measure?

The acid-test ratio, also known as the quick ratio, is a financial metric used to assess a company's liquidity and its ability to meet short-term obligations without relying on the sale of inventory. This ratio specifically focuses on the most liquid assets, such as cash, cash equivalents, and accounts receivable, against current liabilities.

By evaluating the acid-test ratio, stakeholders can quickly determine whether a company has enough liquid assets to cover its current liabilities—an important indicator of financial health and stability. A ratio of greater than one typically signifies that the company can easily pay off its short-term debts, reinforcing its viability in the short term.

Other metrics listed, such as long-term profitability, overall debt ratio, or efficiency of asset utilization, do not focus on this immediate liquidity aspect, which is why they do not accurately describe the purpose of the acid-test ratio.