The acid-test ratio (or quick ratio) is calculated by dividing a company's quick assets by its current liabilities. It helps assess a company's ability to pay its short-term obligations.
For example, a retailer has $50,000 in cash, $30,000 in receivables, $80,000 in inventory, and $60,000 in current liabilities. Excluding inventory, its acid-test ratio is 80,000 ÷ 60,000 = 1.33, indicating it can cover its short-term debts without selling inventory.
Why it matters: It offers a stringent test of liquidity by excluding inventory, showing if a business can survive immediate financial shocks.
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