Acid Test Ratio calculator measures a company’s short-term liquidity, the ability to use its immediate assets to pay its current liabilities. Acid Test Ratio formula is:
Definitions and terms used in Acid Test Ratio Calculator
- Refers to money in the physical form of currency. Cash includes money in the cash pan, petty cash, cash in the locker, bank account and customers’ checks.
- Marketable Securities
- A near-cash (liquid) assets in the form of equity or debt instrument (share/stock, bond or note) that are listed on an exchange and can be readily bought or sold.
- Current Liabilities (short term debt)
- Obligations or debts that are due within one fiscal year or the operating cycle. For example, accounts payable, accrued liabilities, dividends, unpaid taxes and other debts that are due within one year.
What is Acid Test Ratio
Acid Test Ratio is an indicator of company’s short-term liquidity. It measures the ability to use its immediate assets (cash, cash equivalents and marketable securities) to pay its current liabilities.
Acid Test ratio formula is:
Acid Test Ratio Analysis
An Acid test ratio of 0.75:1 or greater is preferred.
Acid test ratio is a more conservative look at a company’s liquidity because is taking in the consideration only the most liquid assets (cash and marketable securities).
Acid test ratio measures to which extend financial obligations can be liquidated immediately, because it eliminates any unknowns surrounding receivables.