Which liquidity measure is known as the acid-test?

The quick ratio is often referred to as the acid-test ratio because it measures a company's ability to meet its short-term liabilities with its most liquid assets, excluding inventory. This ratio is critical because it provides a more stringent assessment of liquidity than the current ratio, which includes inventory—an asset that may not be easily converted to cash in a pinch.

The quick ratio is calculated by taking a company's current assets, subtracting its inventory, and then dividing that figure by its current liabilities. This reflects the company's capacity to pay off its debts using its most liquid assets, providing insight into financial health and risk management without relying on the potentially slow-moving inventory.

Understanding the quick ratio's focus on liquidity is vital for financial analysis, especially in scenarios where quick access to cash is paramount. This characteristic distinguishes the quick ratio as the more severe or "acid-test" measure compared to other liquidity ratios, making it a particularly important tool for financial analysts and investors assessing a company's short-term financial viability.