Acid Test Ratio The Acid Test Ratio, also known as the Quick Ratio, measures a company’s ability to pay its short-term debts using its liquid assets. According to a study by Forbes, a company with a higher Acid Test Ratio has a higher likelihood of being able to pay its debts, which can lead to improved financial stability. This ratio is calculated by adding a company’s cash, accounts receivable, and short-term investments, then dividing that total by its current liabilities. By analyzing this ratio, investors can gain insight into a company’s ability to meet its short-term obligations.
Profitability Ratios Profitability Ratios are a measure of a company’s ability to generate earnings from its sales. A well-calculated Profitability Ratio can help investors determine a company’s financial health and potential for future growth. A study by Harvard Business Review found that companies with high Profitability Ratios tend to outperform their peers in terms of long-term financial performance. The margin is calculated using the formula: profit ratio = turnover – (cost of sales/turnover). This ratio provides valuable insight into a company’s ability to manage its costs and generate profits.