What is acid test ratio

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The acid test ratio is a financial metric used to assess a company's short-term liquidity and ability to pay off its current liabilities.

Also known as the quick ratio, it measures the ability of a company to use its most liquid assets to cover its current liabilities.
The formula for calculating the acid test ratio is (Current Assets - Inventory) / Current Liabilities.
A higher acid test ratio indicates a better ability to meet short-term obligations.
A ratio below 1 suggests that a company may struggle to pay off its current liabilities.
For example, if a company has $100,000 in current assets, $20,000 in inventory, and $50,000 in current liabilities, the acid test ratio would be ($100,000 - $20,000) / $50,000 = 1.6.

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