Friday, February 19, 2010

Acid-test Ratio

Gold does not corrode in acid. To confirm that their gold nuggets are indeed gold, gold miners submerge them into acid for the test. If the nuggets do not get dissolved or destroyed, they have passed the test.
To determine how solvent a company is, you can use the acid-test ratio to find out. The acid-test ratio means: Cash + A/cs Receivable + Short Term Investment divided by Current Liabilities. If the result is less than one, view it with extreme caution.