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What Is Google Finance Acid Test?

I have been talking and writing about the Google finance acid test over the years.  On this occasion, I want to give a full explanation of what it is all about.  

In the end of this article, one will know what is the Google finance acid test, how to use it and why that name.  Let's get started.

Google Finance Acid Test Explained

The Google finance acid test is a compulsory test to determine if a company is or likely to be under pressure to pay its creditors in the short term.  That is essential whether one is a short, medium or long term investor.  

Obviously, it is irrational to adopt a medium or long term investing strategy to buy and hold a stock of a company whose future is uncertain in the short term.  Moreover, a short term bullish market player must think twice before taking a position in those circumstances.  

Therefore, it becomes compulsory that all market players perform the Google finance acid test before taking a bullish or bearish position in the financial markets. 

First Step To Conduct Google Finance Acid Test

Two financials are needed to perform the Google finance acid test.  


The first is the current liabilities (short term debt).  

The second is the current asset.  


One will find both items on the company's balance sheet.  


Firstly, one opens a balance sheet and takes note of the total amount of the current liabilities and asset. 

Then, one will subtract the total current liabilities from the total current asset. 

Difference = Total Current Asset - Total Current Liabilities

That is it. Job is done.

Step Two To Conduct Google Finance Acid Test

The step two consists of ascertaining if the company has passed the test.

For the sake of this explanation, let's call that difference (Current Asset - Current Liabilities) delta.  

If delta is positive or strictly superior to zero then the company has passed the google financial test.  On the other hand, if delta is negative or strictly inferior to zero then that company has failed the Google finance acid test.

In real terms, a company that has a far greater current asset than current liabilities has passed the test.  The higher the current asset in comparison to the current liabilities the better.  The bigger the Delta, the better.  Alright. 

It is similar to an individual who has to pay its monthly credit cards bills.  Alright.  If he or she has a lot money far superior to the amount due, he or she is not under pressure at all.  All is good.  

On the other hand, imagine another person that has only $800, but has to pay $700 monthly bill.  How is he or she going to survive on $100 in Texas for example before the month ends?  That person is under pressure or financially squeezed.  Right?

Unless the creditors offer him or her a friendlier arrangement, he or she will struggle.  Have you ever "been broke" financially?  Alright you get the picture.

Therefore, if a company has a far greater current liabilities than current assets then it is likely to be under pressure to pay its short term debt unless a deal is sorted out quickly with the creditors.  Either way, it is not a typical bullish candidate that an investor or trader will consider. 

Believe it or not, most bullish fundamental traders will stay away from that financial instrument, unless they are taking a calculated risk.

How To Use Google Finance Acid Test?

One can rely on the Google finance acid test to help one to compile a bullish wathlist.
Companies that pass the test go onto the bullish watchlist, and those that fail it are listed on a bearish watchlist.

Warning

One must conduct further fundamental analysis before rushing to buy and hold a stock of a company that has passed the google finance acid test.
One does not have to buy a stock just because it is on a bullish watchlist.  The opposite is also true.

A swing trader must always perform the Google finance acid test otherwise he or she will be going round and round.  

Truly, that acid test will help a swing trader avoid short term losses at a faster pace.  Quite often, many swing traders buy a stock that has failed the Google acid test without knowing it because it was technically bullish. 

I do not know about you, but if it comes to trading and investing, I do not want to confront or fight any market player.  I would rather gang with them to sell or buy peacefully without too much stress.

When one is buying a financial instrument that has failed the Google finance acid test, one will be fighting the short seller that have spotted that the company is under pressure. 

Please understand that there are times when risk tolerant market players do buy a stock of a company that has failed the Google finance acid test.  That is about calculated risk investing strategy that work.

The Google finance acid test does also help to determine the level of risk one is taking.

For example, a risk averse bullish investor will probably stay away from those stocks that have failed the test.  A short seller is more likely to focus on stocks that also failed the test.  A bearish market player who wants to control the risk will use the Google finance acid test to identify the best bearish financial instruments.

Talking about the financial markets probabilities, one can argue that there is a high probability that bullish market players will be circling a stock that has passed the test.  On the other hand, it is fair to say that the bearish traders and investors will be looking for a good excuse to hit the sell button if a stock has not passed the test.  Won't they?

As you can see, there is no limit to what one can do with the Google finance acid test.  In the near future, I will be compiling a YouTube video playlist at 24stocktrader YouTube channel to show many examples of how one can use the Google finance acid test.

Please stay tuned and be patient.

Important Point

One can get both the current asset and liabilities from a balance sheet at both Google finance and Yahoo finance.
Recently, Google has diluted a bit the Google finance, therefore it is OK to use Yahoo finance for the same purpose.

Conclusion

The Google finance acid test is the minimum fundamental analysis one can perform as a lazy market player.  It will help one to build both valid bearish and bearish watchlists.  Stocks that have not passed the test are under pressure in the short term, and must be added to a bearish watchlist.  

Be aware that a stock that is on the bearish watchlist can only be shorted after a bearish signal.  Do not just sell because a financial instrument has failed the the Google finance acid test.

Thank you for reaching the end of this article.  If you like it, please share and bookmark it.  Please remember to say few good words about us in your favourite trading and investing forums.

If you have any questions or comments, please post them at 24stocktrader YouTube channel and I will answer them in due course. 

I wish you the very best.
Happy Trading And Investing
To All

This article is written by
George Beaulieu
Founder Of https://www.Stochastic-macd.com Website