Legal Definitions - acid-test ratio

The acid-test ratio, also known as the quick-asset ratio, is a financial ratio that measures a company's ability to pay off its current liabilities using its most liquid assets. These assets include cash, marketable securities, and accounts receivable.

The formula for calculating the acid-test ratio is:

Acid-Test Ratio = (Current Assets - Inventory) / Current Liabilities

For example, if a company has $100,000 in current assets, $20,000 of which is inventory, and $50,000 in current liabilities, the acid-test ratio would be:

($100,000 - $20,000) / $50,000 = 1.6

A ratio of 1 or higher is generally considered good, as it indicates that the company has enough liquid assets to cover its current liabilities. A ratio of less than 1 may indicate that the company may have difficulty paying off its debts.

Overall, the acid-test ratio is an important measure of a company's financial health and liquidity.