1. What is the Acid Test Ratio?

The Acid Test Ratio (also known as the Quick Ratio) measures a company's ability to pay short-term liabilities with liquid assets. It's a stringent test of liquidity that excludes inventory from current assets.

2. How Does the Calculator Work?

The calculator uses the Acid Test Ratio formula:

Where:

• Cash — Currency and cash on hand
• Cash Equivalents — Short-term, highly liquid investments
• Marketable Securities — Liquid financial instruments
• Accounts Receivable — Money owed by customers
• Current Liabilities — Debts due within one year

Explanation: The ratio shows how well a company can meet its short-term obligations without selling inventory.

3. Importance of Acid Test Ratio

Details: A ratio of 1 or higher is generally considered good, indicating the company has enough liquid assets to cover current liabilities. Lower values may signal liquidity problems.

4. Using the Calculator

Tips: Enter all values in currency amounts. Current liabilities must be greater than zero for calculation. Results are rounded to two decimal places.

5. Frequently Asked Questions (FAQ)

Q1: How is this different from Current Ratio?
A: Current Ratio includes all current assets (including inventory), while Acid Test Ratio only includes the most liquid assets.

Q2: What's a good Acid Test Ratio?
A: Generally 1:1 or higher is good, but this varies by industry. Some businesses operate successfully with lower ratios.

Q3: Why exclude inventory?
A: Inventory may not be quickly convertible to cash, especially in distressed situations.

Q4: Can the ratio be too high?
A: Yes, an excessively high ratio might indicate inefficient use of liquid assets that could be invested for growth.

Q5: How often should this be calculated?
A: Typically calculated quarterly with financial statements, or more frequently for companies with liquidity concerns.