A measure of a company's ability to meet its short-term
obligations using its most
liquid assets. It is calculated by subtracting inventories from
current assets and dividing the quantity by its
current liabilities. A higher acid-test ratio indicates greater short-term financial health. The acid-test ratio is more conservative than the
current ratio, which measures much the same thing, because the current ratio excludes the
value of
inventory. This is because inventory can be less liquid than other current assets. The acid-test ratio thus measures a company's ability to meet obligations in a worst-case scenario. It is also called the quick ratio.