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.