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
- Determine Quick Assets: Current assets minus inventory.
- 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.
