What does the Quick Asset Ratio measure?

The Quick Asset Ratio, also known as the Acid-Test Ratio, specifically measures a firm's ability to meet its short-term obligations using its most liquid assets. Quick assets typically include cash, marketable securities, and accounts receivable—assets that can be quickly converted into cash. This ratio focuses on measuring the firm's immediate liquidity position by comparing quick assets to current liabilities, thereby assessing the ability to cover short-term debts without relying on the sale of inventory.

This financial metric is important because it provides a clearer picture of a company’s short-term financial health than current ratios, which include inventory that may not be as easily converted to cash. Thus, the Quick Asset Ratio indicates how well a company can manage its short-term liabilities with its quickly accessible assets.

In contrast, the other options do not accurately reflect the function of the Quick Asset Ratio. The first option describes a broad ratio of total assets to liabilities, which does not focus on liquid assets. The second option, while mentioning quick assets, incorrectly relates it to total assets rather than current liabilities. The last option incorrectly associates the ratio with overall profitability, which is not what the Quick Asset Ratio measures.