Acid Test Ratio

The acid test ratio is computed by adding cash, temporary marketable securities, and receivables and dividing that total by current liabilities.

The acid test ratio measures whether or not a company can pay its debt quickly. Before lending money to a company a bank wants to know if a company has assets that it can sell quickly to repay a bank loan. The bank may seize these assets if a loan has not been paid. In contrast, if you are a shoe store the bank has no interest in seizing your shoes because they have no ready market for them. The acid test ratio is only interested in assets that can be sold quickly. It is sometimes called the Quick Ratio.

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