Acid Test Ratio Calculator

What is the acid test ratio?

The acid test ratio, also called the quick ratio, measures whether a company can pay its short-term debts with its most liquid assets. It is stricter than the current ratio because inventory and prepaid expenses are left out. Analysts, lenders, and business owners use it as a quick liquidity screen. All math runs in your browser.

Liquidity ratios sit alongside profitability analysis. After you know net income from the accounting profit calculator, the accrual ratio calculator checks how much of those earnings are backed by cash rather than accounting adjustments. To evaluate whether tight liquidity threatens broader enterprise solvency, check the multi-year bankruptcy risk with the Altman Z-Score calculator. If the business is expanding assets faster than internal funding, the additional funds needed calculator estimates how much new debt or equity is required.

Acid test ratio formula

Quick assets are cash, marketable securities, and accounts receivable. Current liabilities include accounts payable, accrued expenses, wages payable, taxes payable, and short-term debt due within one year.

Some analysts compute the same ratio by subtracting inventory and prepaid expenses from total current assets. Both methods answer the same question when the balance sheet is consistent.

Worked example

Suppose a business reports $31,500 in cash and cash equivalents, $15,700 in marketable securities, $10,300 in accounts receivable, and $44,100 in current liabilities. Quick assets total $57,500. Dividing by current liabilities gives an acid test ratio of about 1.30, meaning liquid assets cover short-term obligations 1.3 times over.

How to interpret the result

A ratio of 1.0 or higher usually signals that quick assets can meet near-term obligations without selling inventory. Ratios well above 1.0 can mean strong liquidity, but they may also mean cash is sitting idle instead of being reinvested. Ratios below 1.0 suggest the company may need inventory sales, new financing, or faster collections to pay bills on time.

Context matters. A retailer with fast inventory turnover may run a lower quick ratio than a software firm with little inventory. Seasonal businesses should compare the same point in the cycle year over year. Stale receivables over 90 days may not convert to cash quickly, so some analysts trim doubtful accounts before calculating the ratio.

Acid test ratio vs current ratio

The current ratio divides all current assets by current liabilities. Because inventory and prepaid items are included, the current ratio is usually higher and less conservative. The acid test ratio focuses only on assets that can be turned into cash quickly, which makes it a better stress test when collections slow or inventory is hard to sell.

Frequently asked questions