Acid Test Ratio

Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What is the Acid Test Ratio?

The acid test ratio measures a company’s short-term liquidity, indicating its capacity to pay off current commitments using just its most liquid assets. It is calculated by dividing the sum of cash, cash equivalents, marketable securities or short-term investments, and current accounts receivables by the total current liabilities.

Understanding the acid test ratio is very important as it shows the company’s potential to quickly convert its assets into cash to satisfy its current liabilities. For example, suppose an entity has an adequate liquid asset to cover its current liabilities. In that case, it does not need to liquidate any of its long-term assets to meet its current obligations. This is paramount since most businesses rely on long-term assets to generate additional revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any more.

Key Takeaways

  • The acid test ratio measures a company’s short-term liquidity, focusing on its ability to meet current obligations using highly liquid assets.
  • Calculate the ratio by dividing the sum of cash, cash equivalents, marketable securities, short-term investments, and current accounts receivables by total current liabilities.
  • The acid test ratio demonstrates a company’s ability to convert assets into cash to fulfill current liabilities quickly.
  • An acid test ratio above 1.0 indicates financial stability and sufficient capability to meet short-term obligations. It is a more conservative measure than the current ratio, which includes inventory that takes longer to convert into cash.

Acid Test Ratio Formula

Acid Test Ratio = (Cash + Cash Equivalents + Marketable Securities + Current Accounts Receivables) / Total Current Liabilities

You are free to use this image o your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Acid Test Ratio (

Another more popular formula calculates the acid test ratio first by deducting inventory from the total current assetsCurrent AssetsCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, more and dividing the value by the current liabilitiesCurrent LiabilitiesCurrent Liabilities are the payables which are likely to settled within twelve months of reporting. They're usually salaries payable, expense payable, short term loans more. Inventory is excluded in this formula because it is not considered a rapid cash convertible. Mathematically it is represented as: –

Acid Test Ratio Formula 1

Financial Modeling & Valuation Course (25+ Hours of Video Tutorials)

If you want to learn Financial Modeling & Valuation professionally , then do check this ​Financial Modeling & Valuation Course Bundle​ (25+ hours of video tutorials with step by step McDonald’s Financial Model). Unlock the art of financial modeling and valuation with a comprehensive course covering McDonald’s forecast methodologies, advanced valuation techniques, and financial statements.

Video Explanation of Acid Test Ratio



Below are some examples to understand the concept in a better manner.

You can download this Acid Test Ratio Formula Excel Template here – Acid Test Ratio Formula Excel Template
Example #1

The following are the current assets and current liabilities of ABC Ltd.: –

acid test ratio formula example 1
  • Acid test ratio = ($2,500 + $12,500) / ($12,500 + $1,500 + $500)
  • = 1.03
Example #2

The following are the current assets and current liabilities of Apple Inc. for the period ending 29 September 2018: –

Acid Test Ratio Example 2

Calculate the acid test ratio of Apple Inc. for the period ending 29 September 2018: –

  • = ($25,913 + $40,388 + $48,995 + $12,087) / ($55,888 + $20,748 + $40,230)
  • = 1.09


Apple’s Example

Now let us take the real-life example in Excel of Apple Inc.’s published financial statementFinancial StatementFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all more for the last four accounting periodsAccounting PeriodsAccounting Period refers to the period in which all financial transactions are recorded and financial statements are prepared. This might be quarterly, semi-annually, or annually, depending on the period for which you want to create the financial statements to be presented to investors so that they can track and compare the company's overall more.

You can easily calculate the ratio in the template provided.

Example 1

Based on the publicly available financial informationFinancial InformationFinancial Information refers to the summarized data of monetary transactions that is helpful to investors in understanding company’s profitability, their assets, and growth prospects. Financial Data about individuals like past Months Bank Statement, Tax return receipts helps banks to understand customer’s credit quality, repayment capacity more of Apple Inc., we can calculate the ratio for the accounting years 2015 to 2018.

Example 1-1

The result will be:-

Example 1-2

From the above table, it can be seen that the acid test ratio of Apple Inc. has been continuously greater than 1.0 during the period mentioned above, which is a positive sign for any company as it signifies a comfortable liquidity position.

Frequently Asked Questions (FAQs)

1. What is the difference between the acid test and current ratios?

The acid test ratio, also known as the quick ratio, measures a company’s ability to pay off its current liabilities using its most liquid assets. It excludes inventory from the calculation, unlike the current ratio, which includes it. Therefore, the acid test ratio provides a more conservative measure of short-term liquidity.

2. What is the application of the acid test ratio?

Investors, creditors, and analysts commonly use the acid test ratio to assess a company’s short-term financial health and liquidity. It helps determine if a company has enough liquid assets (such as cash and cash equivalents) to cover its immediate obligations, such as debt payments and operational expenses.

3. What are the limitations of the acid test ratio?

While the acid test ratio provides valuable insights, it has certain limitations. It does not consider the timing of cash inflows or the company’s ability to generate sales. Moreover, it may not be applicable to all industries, particularly those heavily reliant on inventory or where quick asset conversion is difficult. Additionally, different companies may have varying interpretations of what qualifies as a liquid asset, affecting the ratio’s accuracy for comparison.

Recommended Articles

This article is a guide to Acid Test Ratio and its meaning. We discuss the formula for the acid test ratio along with an acid test ratio example. You may learn more about financial statement analysis from the following articles: –

Reader Interactions

Leave a Reply

Your email address will not be published. Required fields are marked *