An indicator of a company’s ability to pay its short term liabilities with its short term assets. Sometimes this is referred to as the quick ratio (QR). This analyses the amount of liquidity provided by the current assets, taking into account all the elements of the current assets (cash and cash equivalents, short-term investments and accounts receivable) except inventory, to see whether it´s possible to pay back the current short-term liabilities.
On occasions, this can be called the Second Degree liquidity measurement. Given the selective analysis that is performed on liquidity, some authors identify this as a reduced liquidity, strict liquidity or immediate solvency.
When deciding on the value to admit to be able to pass the test, certain factors must first be taken into consideration such as the payback periods, the possibility of receiving a loan to cover shortcomings of the liquid assets, the turn-over, etc.
The same as with other ratios, this ratio should be considered, indifferent to its value, along with the aspect of time or, for example, the debts´ maturity and the business´s collection rights.