Definition of Acid Test Ratio

The ratio of a company’s current assets to its current liabilities is known as the acid test ratio. It is a measure of the company’s ability to stay liquid during times of unexpected volatility without having to sell its product. That’s why it is called the acid-test! Can it stay liquid when things are burning? Figuratively.

Points to Remember:

• The financial strength of the company is determined by this ratio.
• Since this ratio does not take into account the illiquid assets, therefore it is more robust than the current ratio.