Glossary definition

What is an acid test ratio?

Acid test ratio

Also known as the Quick ratio, the acid test ratio is similar to the Current ratio but differs by excluding inventory and prepaid expenses, and by limiting assets to liquid assets such as cash and items that the business can quickly convert to cash.

The formula for the acid-test ratio is
(Cash + Accounts Receivable + Short-term Investments) / Current Liabilities = Acid test ratio

Lenders consider a business that has an acid test ratio around 1.0 to be in good condition because, at this level, liquid (quick) assets approximately equal current liabilities.

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