Acid Test Ratio

What Is the Acid Test Ratio?

The acid test ratio, also known as the quick ratio, measures a company’s ability to pay off its current liabilities without relying on the sale of inventory. It is a stringent test of liquidity.

Key Takeaways

  • Formula: (Current Assets – Inventory) / Current Liabilities 
  • Purpose: To assess immediate financial health. 
  • Ideal Ratio: A ratio of 1 or above is generally considered good.

How to Calculate the Acid Test Ratio

  1. Determine Quick Assets: Current assets minus inventory. 
  2. Divide by Liabilities: Divide quick assets by current liabilities to get the ratio. 

Importance of the Acid Test Ratio

The acid test ratio is crucial for understanding a company’s short-term liquidity and its ability to meet immediate obligations without selling inventory.


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