If you’re in business, there would be occasions when you have to decide which customer can access your trade-on-credit facility.
There would also be occasions when you have to select a borrower from a list of many. What could help you decide is their credit ratings.
Credit ratings will show if prospective debtors or borrowers are bad credit risks and good credit risks.
For corporate customers and borrowers, a test of their solvency or liquidity is possible with an access to their books.
Either a current ratio or an acid test ratio analysis of their financial statements for the purpose of test of liquidity could be done.
What is current ratio?
Current ratio compares total current assets to current liabilities to determine the availability of adequate short term assets to meet short term liabilities.
What is acid test ratio?
The acid test or the quick ratio is like the current ratio. The only difference is that the acid test ratio excludes stock from analyzed current assets.
Stock is excluded because it’s considered to be illiquid; current and future market forces may work against the quick conversion of stock to liquid in a short time.
Download Current ratio and acid test ratio template;