Cash ratio

Calculation: quick assets / current liabilities

Also called the acid test ratio or the cash ratio, it indicates the company's ability to pay off the immediate demands of creditors using its most liquid and current assets; these can be converted quickly into cash, temporary investments, and marketable securities. It gives a more realistic picture of a business's ability to repay current obligations than the current ratio as it excludes inventories and prepaid items for which cash cannot be obtained immediately. This ratio is usually used as a supplement to the current ratio.

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