
Acid-Test Ratio
The Acid-Test Ratio is a measure of a company’s liquidity and financial health. It is calculated by taking the company’s total current assets and dividing it by its total current liabilities. This ratio indicates how easily a company can pay off its short-term debts with its most liquid assets.
The formula for acid-test ratio is: Acid-Test Ratio = Total Current Assets ÷ Total Current Liabilities
For example, if a company has total current assets of $100,000 and total current liabilities of $50,000, the acid-test ratio would be 2.0. This indicates that the company has twice as many liquid assets as liabilities and is in good financial health.