Acid-Test Ratio

Acid-Test Ratio

Ratio: (Current Assets less Inventory) divided by Current Liabilities

This is a variant of the Current Ratio; it only includes items which are quickly converted into current assets. It is called ‘Acid-Test’ because it measures the ability to meet unexpected demands without depending on the sale of inventory.

Also called Quick Ratio. A Quick Ratio of 1 is a good benchmark. Higher ratios indicate a satisfactory condition. Decreasing ratios indicate either a deteriorating cash position or a deteriorating demand for products. Ratios below ½ indicate a potentially severe situation like slow moving inventory and a higher chance of bankruptcy.

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