ACID-TEST RATIO
Back to GlossaryDefinition
A liquidity ratio—also called the quick ratio—that gauges whether a company can meet short-term obligations using quick assets (excluding inventory).
Summary
The Acid-Test Ratio, also known as the Quick Ratio, is a financial metric that measures a company's ability to pay off short-term debts using only the most liquid assets. Unlike other liquidity ratios, it excludes inventory because inventory can be difficult to convert to cash quickly. The formula is (Current Assets - Inventory) ÷ Current Liabilities. A ratio of 1.0 or higher generally indicates good short-term financial health, meaning the company can cover its immediate obligations without relying on inventory sales.
Usage Context
Essential when analyzing company financial statements, assessing creditworthiness, making investment decisions, or evaluating a company's short-term financial stability and liquidity management.
Common Confusions
- Thinking inventory should be included in quick assets
- Confusing the acid-test ratio with the current ratio
- Believing a higher ratio is always better without considering industry context
- Not understanding what qualifies as 'quick' assets
- Assuming the ratio should always be exactly 1.0
