What is Acid Test Ratio?
The Acid Test Ratio (Quick Ratio) is a liquidity metric that measures a company's ability to pay short-term obligations using its most liquid assets. It excludes inventory from current assets, providing a stringent assessment of financial health. A ratio of 1:1 indicates the company can exactly pay its current liabilities without selling inventory. This calculator helps investors and creditors evaluate immediate liquidity risk without relying on inventory conversion to cash.
Calculator
Formula
Acid Test Ratio = (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities
Advantages
- Liquidity Focus: Measures immediate liquidity by excluding less-liquid inventory
- Risk Assessment: Helps creditors assess short-term repayment capacity
- Comparability: Standard metric for cross-industry comparisons
- Trend Analysis: Useful for tracking liquidity changes over time
- Financial Health Indicator: Reveals ability to meet sudden obligations
- Investment Decision Tool: Helps investors evaluate company stability
- Quick Snapshot: Provides instant liquidity position without complex calculations
Disadvantages
- Industry Limitations: Less relevant for inventory-dependent businesses
- Static Measurement: Reflects position at single point in time
- Receivable Reliability: Assumes accounts receivable are collectible
- Market Fluctuations: Doesn't account for marketable securities' value changes
- Cash Timing Issues: Doesn't consider cash flow timing mismatches
- Overly Conservative: May present unnecessarily bleak picture for inventory-rich companies
- No Future Insight: Doesn't predict future liquidity improvements/deteriorations
- Limited Scope: Should be used with other financial ratios for full analysis
- Seasonal Factors: May not account for seasonal business variations
- International Differences: Doesn't accommodate varying accounting standards globally