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How Acid-Test Ratios Are Used in Business and Investing

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The acid-test ratio is a financial metric that assesses a company’s ability to cover short-term liabilities with its most liquid assets.

A higher ratio suggests a firm has strong liquidity, reducing the risk of financial distress.

A lower ratio may indicate potential cash flow challenges.

Acid-Test Ratio originates from the historical practice of using acid to test the purity of gold.

The acid-test ratio provides a strict test of a company's liquidity.

It measures whether a business can meet its short-term obligations using only its most liquid assets.