Acid-Test Ratio

Search Dictionary

Definition of 'Acid-Test Ratio'

The acid-test ratio, also known as the quick ratio or the cash ratio, is a liquidity ratio that measures a company's ability to pay its short-term obligations with its most liquid assets. The acid-test ratio is calculated by dividing a company's current assets minus inventory by its current liabilities.

The acid-test ratio is a more stringent measure of liquidity than the current ratio because it excludes inventory from the numerator. Inventory is a less liquid asset than cash, accounts receivable, and marketable securities because it cannot be converted into cash as quickly.

A high acid-test ratio indicates that a company has a strong liquidity position and is able to meet its short-term obligations. A low acid-test ratio, on the other hand, indicates that a company may have difficulty meeting its short-term obligations.

The acid-test ratio is a useful tool for investors and creditors to assess a company's financial health. A high acid-test ratio can give investors confidence that a company is able to meet its short-term obligations, while a low acid-test ratio may indicate that a company is at risk of default.

The acid-test ratio is also used by analysts to compare a company's liquidity to that of its peers. A company with a higher acid-test ratio than its peers is considered to be more liquid.

The acid-test ratio is a valuable tool for assessing a company's liquidity position, but it should be used in conjunction with other financial ratios to get a complete picture of a company's financial health.

Do you have a trading or investing definition for our dictionary? Click the Create Definition link to add your own definition. You will earn 150 bonus reputation points for each definition that is accepted.

Is this definition wrong? Let us know by posting to the forum and we will correct it.