Which of the following ratios measures a firm's liquidity?

Select one:

a. debt-equity ratio

b. acid test ratio

c. return on assets

d. fixed asset turnover ratio

 

(b) acid test ratio

Acid test ratio is also known as the working capital ratio since it ignores assets such as inventory, which may be difficult to quickly liquidate.

The acid-test, or quick ratio, compares a company's most short-term assets to its most short-term liabilities to see if a company has enough cash to pay its immediate liabilities, such as short-term debt.

Liquidity ratios are used to measure a debtor's capacity to meet its current debt obligations. Thus more liquid the assets are more safer will a business be to pay off its current debt obligations

Four commonly used liquidity ratios are

Current ratio, Acid test ratio, Cash ratio, and Operating cash flow ratio

Current ratio-Current liabilities. Thus more the value of the ratio the more comfortable is the business to pay off current debt obligations