acid-test ratio


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Acid-Test Ratio

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.

acid-test ratio

current ratio

or

acid-test ratio

an accounting measure of a firm's ability to pay its short-term liabilities out of its quickly-realizable CURRENT ASSETS, which expresses the firm's liquid current assets (DEBTORS plus cash) as a ratio of CURRENT LIABILITIES. Sometimes called the ‘quick ratio’, this is a more stringent test of liquidity than the WORKING CAPITAL RATIO, because it excludes STOCK from CURRENT ASSETS on the grounds that STOCKS cannot be as readily convertible into cash to meet short-term debts as can DEBTORS where the goods or services have already been sold and only collecting the money remains.
References in periodicals archive ?
Results indicate that there is positive and significant relationship between the acid-test ratio of enterprises and the success of early -return enterprises, meaning that the more the ratio of total assets value to the total debt value in an enterprise, the more the efficiency and capability would be resulted.
In terms of the acid-test ratio as well, the findings are indicative of better short-term liquidity position when compared to the findings of Jain and Kumar on private sector enterprises for the period 1985-1995, when the mean acid-test ratio reported was 0.89.
The trading cycle ratio (Solution 1)--which is a narrower measure of liquidity than the current-period ratio--can be thought of as a substitute for the old acid-test ratio (or quick ratio), which also was intended to give a narrower measure of liquidity by excluding less-liquid accounts such as inventory.
As a general rule of thumb, an acid-test ratio of more than 1 gives potential creditors a greater degree of comfort.
This is always vital and it is important to choose appropriate measures here for each period - eg, the quick or acid-test ratios in the short term; the current or working-capital ratios in the medium term; and asset acquisition and disposal programmes in the long term.