Acid Ratio

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Definition

The ACID Ratio is sometimes referred to as the Quick Ratio or the Cash Ratio. The Quick Ratio is Cash, Short Term Investments, and Accounts Receivables / Current Liabilities; the Cash Ratio is Cash and Short Term Investments / Current Liabilities.

The name ACID Ratio apparently stems from the ability of tough materials to survive acid. In the circumstance here, these solvency ratios are the ability of a company's balance sheet to survive current liabilities that a company may have. Can a company survive here using its most liquid assets?

You'll find that in finance, many different formulas and names are often referred to something else. In the circumstance here, the ACID Ratio has been used for two different formulas of Cash and Quick. In the context of someone saying the ACID Ratio, always make sure to clarify, "are you including accounts receivables?"

Some investors find accounts receivables to be an easily liquid asset, whereas others don't. Situations where this often arise - Let's say a company has an Accounts Receivable for $50 million. If all its Accounts Receivables are filled with good, on-time paying customers (like you and me), AR is a liquid account. If all its Accounts Receivables are filled with never-paying, defaulting customers (like Enron), the Accounts Receivable is not a liquid account.

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