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The percentage of acid test is a financial scale that evaluates the company's ability to cover short -term obligations with its most liquid assets. The higher acid test rate indicates a stronger liquidity position, while a lower percentage may indicate possible cash flow challenges. Investors and analysts use this scale to evaluate financial health, especially in industries that may not be easily converted into cash.
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Acid test, also known as as RapidIt is the proportion of liquidity that is calculated by dividing the assets of the most liquid company through its current obligations. The formula is:
Acid test ratio =
Money + marketable securities + arrest accounts / current obligations
This account excludes inventory and pre -expenses as it may not be quickly converted into cash. Marketable securities Include short -term investments that can be sold easily, while the accounts due represent the company's money that is expected to be collected soon.
For an example of how this account works, consider a $ 50,000 company in cash, $ 20,000 in marketable securities, $ 30,000 in arrest accounts and $ 80,000 in current obligations. The acid test rate will be: 50,000 + 20,000 + 30,000 / 80,000 = 1.25
The percentage higher than 1.0 indicates that liquid assets exceed short -term obligations and are usually a sign of financial health, while the ratio of less than 1.0 indicates possible liquidity restrictions and may indicate poor financial health and higher risks. However, the results must be interpreted, because their meaning varies according to the industry. For example, some companies work efficiently with lower proportions due to the fixed cash flow.
The acidic test rate helps companies and investors assess financial stability in the short term. Companies use them to assess liquidity and determine whether they have enough money and upcoming diseases to cover immediate obligations without selling stock or additional financing. A decrease over time may indicate problems in the cash flow, which causes the administration to improve the collection of dues or reduce short -term debts.
Investors analyze the acid test rate to compare companies in the same industry. A higher percentage indicates that a strong company LiquidityReducing the risk of financial distress. However, a high percentage may indicate that the capital is not dispensed and can be investing to grow. In contrast, the ratio of less than 1.0 can indicate a potential decrease in money, especially in industries with unpredictable revenue flows.
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