The Acid Test Ratio is a crucial metric in assessing a company's financial stability. Calculated by dividing current assets by current liabilities, it provides insight into a company's ability to meet its short-term financial obligations. In other words, it measures the company's liquid assets against its current liabilities. This ratio is often used by investors and lenders to determine a company's financial health. A high Acid Test Ratio indicates a strong financial position, while a low ratio may raise concerns about the company's ability to meet its short-term financial obligations.
