Acid Test (Liquidity Ratio)

In finance, the acid-test or quick ratio or liquidity ratio measures the ability of a company to use its near cash or quick assets to extinguish or retire its current liabilities immediately. Quick assets include those current assets that presumably can be quickly converted to cash at close to their book values. It is the ratio between quick or liquid assets and current liabilities.

A normal liquid ratio is considered to be 1:1. A company with a quick ratio of less than 1 cannot currently fully pay back its current liabilities.

This ratio is considered to be much better and reliable as a tool for assessment of liquidity position of firms.

${\displaystyle {\mbox{Liquid Ratio}}={{\mbox{Liquid Assets}} \over {\mbox{Current Liabilities}}}}$

${\displaystyle {\mbox{Quick (Acid Test) Ratio}}={{\mbox{Cash and Cash Equivalent}}+{\mbox{Marketable Securities}}+{\mbox{Accounts Receivable}} \over {\mbox{Current Liabilities}}}}$

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