The acid-test ratio compares the Quick Assets of a business to its Current Liabilities.

Quick Assets are the business assets that can be converted into cash quickly; this generally means within 90 days.

Quick Assets include Cash, short-term liquid marketable securities, and Accounts Receivable.

It is a metric that is used to determine short-term liquidity of a business. It calculates the ability of a company to pay its bills as they come due in the short term.

It is considered the most stringent calculation of short-term liquidity. The formula for calculating it is:

Acid-Test Ratio = Quick Assets / Current Liabilities

It indicates how many dollars a business has available to pay for each dollar of bills it owes.

For example, a business with a ratio of 2 has $2 in Quick Assets available to pay for $1 in Current Liabilities. This is a good ratio because the business is liquid and comfortable enough to pay its current bills.

What Minimum Acid-Test Ratio is Good?

A rule of thumb is that a business should have an acid-test ratio of at least 1:1. That is, the business has at least $1 in Quick Assets to pay for $1 in Current Liabilities.

How to Fix Acid-Test Ratio Problem

A company with a ratio of less than one could be in financial trouble, at least in the short-term. It lacks the liquidity to cover its current short term liabilities.

It needs to generate cash from operations (sales) or investors. In some cases, the business may have actually generated sales but may not be managing its Accounts Receivable correctly, and has not collected payment from its customers’ outstanding invoices.