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Acid-Test Ratio Calculator

What Is the Acid-Test Ratio / Quick Ratio?

The acid-test ratio, commonly known as the quick ratio, uses a firm's balance sheet data as an indicator of whether it has sufficient short-term assets to cover its short-term liabilities. Our Acid-Test Ratio Calculator provides easy way to see that.

Understanding

Companies with an acid-test ratio of less than 1 do not have enough liquid assets to pay their current liabilities and should be treated with caution. If the acid-test ratio is much lower than the current ratio, it means that a company's current assets are highly dependent on inventory. This is not a bad sign in all cases, however, as some business models are inherently dependent on inventory. Retail stores, for example, may have very low acid-test ratios without necessarily being in danger. The acceptable range for an acid-test ratio will vary among different industries, and you'll find that comparisons are most meaningful when analyzing peer companies in the same industry as each other.

What it tells you?

The acid-test, or quick ratio, shows if a company has, or can get, enough cash to pay its immediate liabilities, such as short-term debt. For most industries, the acid-test ratio should exceed 1. If it's less than 1, then companies do not have enough liquid assets to pay their current liabilities and should be treated with caution. If the acid-test ratio is much lower than the current ratio, it means that a company's current assets are highly dependent on inventory. On the other hand, a very high ratio could indicate that accumulated cash is sitting idle, rather than being reinvested, returned to shareholders, or otherwise put to productive use.

Drawbacks

The acid-test ratio alone is not sufficient to determine the liquidity position of the company. Other liquidity ratios such as the current ratio or cash flow ratio are commonly used in conjunction with the acid-test ratio to provide a more complete and accurate estimation of a company’s liquidity position.

The ratio excludes inventory from the calculation because inventory is not generally considered a liquid asset. However, some businesses are able to quickly sell their inventory at a fair market price. In such cases, the company’s inventory does qualify as an asset that can readily be converted into cash.

The ratio does not provide information about the timing and level of cash flows, which are important factors in accurately determining a company’s ability to pay its obligations when they are due.

The acid-test ratio assumes that accounts receivable are easily and readily available for collection, but that may not actually be the case.

Quick Ratio Formula

Quick Ratio = (currentAssets - inventory) / currentLiabilities

Examples

CashAccounts ReceivableShort Term DebtCurrent LiabilitiesRatio
30,00010211,0002.74:1
5,90078052,3672.82:1
3,1001005004,0000.93:1

Sources

CFIAcid-Test RatioBDCMore about the Acid-Test RatioInvestopediaAcid-TestInvestopediaHow is the Acid-Test Ratio Calculated?