What is the acid test ratio?

The acid test ratio, also known as the quick ratio or the liquid ratio, is a financial metric used to determine a company's short-term liquidity and ability to pay its immediate liabilities. It is calculated by subtracting a company's current liabilities from its quick assets (such as cash, marketable securities, and accounts receivable) and dividing the result by its current liabilities.

Unlike the current ratio, which includes all current assets, the acid test ratio only considers the most liquid assets that can be quickly converted into cash to cover the company's short-term debts. A high acid test ratio indicates that a company has a strong ability to meet its immediate obligations without relying on selling inventory or other less liquid assets. In general, a quick ratio of 1:1 or above is considered to be a good measure of a company's liquidity, while a ratio of less than 1:1 may signal problems in meeting immediate obligations.

It is important to note that the acid test ratio is just one metric among many that is used to evaluate a company's financial health and should not be relied upon in isolation. Other important factors to consider include a company's profitability, operating cash flow, debt levels, and overall financial performance.