Definition: A measurement of how well a business can meet its short-term financial obligations without selling any inventory.
The purpose of this calculation is to show how easily a company could be liquidated, and therefore help financial institutions decide upon how credit worthy the company is.
A ratio greater than 1:1 is good and indicates the business can pay their current liabilities without being dependent on the sale of inventory.
Current Assets - Inventories ÷ Total Current Liabilities
Also Known As: Quick Ratio, Liquid Ratio
Examples:
After examining our low acid-test ratio, our store is considering how we can liquidate some inventory to generate cash.
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