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Acid Test Ratio (Quick Ratio) Calculator

Stricter measure of short-term liquidity.

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Acid Test Ratio

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Overview

The Acid Test Ratio, commonly referred to as the Quick Ratio, measures a company's ability to meet its short-term financial obligations using only its most liquid assets. By excluding inventory from current assets, it provides a more conservative and stringent assessment of liquidity than the standard current ratio.

Symbols

Variables

ATR = Acid Test Ratio, CA = Current Assets, INV = Inventory, CL = Curr. Liabilities

ATR
Acid Test Ratio
Variable
CA
Current Assets
£
INV
Inventory
£
CL
Curr. Liabilities
£

Apply it well

When To Use

When to use: This ratio is best applied when evaluating the immediate solvency of a business, especially in industries where inventory takes a long time to convert into cash. It is used by creditors and analysts to assess if a company can cover its debts in a worst-case scenario without relying on sales.

Why it matters: It serves as a critical indicator of financial health, as a ratio significantly below 1.0 suggests a company may struggle to pay off current liabilities if they were called today. High ratios indicate a strong liquidity position, reducing the risk of default during economic downturns.

Avoid these traps

Common Mistakes

  • Forgetting to subtract inventory from total current assets.
  • Convert units and scales before substituting, especially when the inputs mix £.
  • Interpret the answer with its unit and context; a percentage, rate, ratio, and physical quantity do not mean the same thing.

One free problem

Practice Problem

A retail chain reports current assets of 100,000. If their inventory is valued at $120,000, what is their Acid Test Ratioù

Current Assets250000 £
Inventory120000 £
Curr. Liabilities100000 £

Solve for: ATR

Hint: Subtract the inventory from the total current assets before dividing by the liabilities.

The full worked solution stays in the interactive walkthrough.

References

Sources

  1. Wikipedia: Quick Ratio
  2. Financial Accounting by Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso
  3. Investopedia: Acid-Test Ratio
  4. Hayes, Adam. 'Acid-Test Ratio.' Investopedia, 2023.
  5. Ross, Stephen A., Westerfield, Randolph W., and Jordan, Bradford D. 'Corporate Finance.' 12th ed., McGraw-Hill Education, 2019.
  6. Wikipedia contributors. 'Quick ratio.' Wikipedia, The Free Encyclopedia, 2023.
  7. AQA A-level Business Specification or equivalent A-level Business textbook