Acid Test Ratio
Acid Test Ratio/Quick Ratio Calculator Explained:
(a) What is this? The Acid Test ratio, also known as a Quick Ratio, indicates whether a business can meet its current liabilities.
(b) What does this tell me? In finance, the Acid Test Ratio or Quick Ratio or Liquid Ratio measures the ability of a company to use its "near" cash or "quick assets" to immediately extinguish or retire its current liabilities. Generally speaking, the Acid Test ratio should be 1.1 or better, however, this varies widely by industry. In general, the higher the ratio the better the company is placed to meet its debts. If the acid test ratio is much lower than working capital it means current assests are highly dependent on inventory, such as in retail stores.
(c) Why should I use it? To make sure your business can meet its debt obligations. You can take steps to address a situation where the ratio falls below 1:1. Below 1.0 indicates a business has significant issues requiring immediate professional financial assistance.
(d) Caution: Each business is different. A ratio of 1.1 is simply a broad rule of thumb. Seek immediate professional financial assistance if required. Decisions made as a result of these calculations are at your risk.