# acid test ratio”: A Guide to Forex Trading & Management

## Overview of the Acid-Test Ratio

The Acid-Test Ratio, also known as the quick ratio or acid-test liquidity ratio, is an important measure of short-term financial health for businesses. It examines how much of a company’s short-term assets can be quickly turned into cash in order to pay off short-term liabilities. This ratio is used by lenders, investors, and other stakeholders to assess how safe an investment is in a company. In order for a business to succeed long-term, the Acid-Test Ratio must be healthy.

An Acid-Test Ratio is calculated by taking the sum of a company’s most liquid assets (e.g., cash, marketable securities, and any receivables that can easily be collected on time) and dividing it by the sum of current liabilities. Typically, most businesses should aim to have an Acid-Test Ratio of 1.0 or higher. A lower ratio indicates a lack of liquidity, which could lead to insolvency or bankruptcy.

## Calculating the Acid-Test Ratio

The Acid-Test Ratio is calculated by subtracting any inventory from a company’s current assets and then dividing the result by the total of the current liabilities. For example, a company might have \$20 million in cash, \$15 million in marketable securities, and \$25 million in receivables. Its total current assets would then be \$60 million minus any inventory, which would give the company a ratio of 1.5x. This means that it has enough liquid assets to cover its current liabilities.

Another way to calculate the Acid-Test Ratio is to subtract any inventory from a company’s total assets and then divide the result by its current liabilities. In this case, the company might have a total of \$90 million in assets, minus any inventory, which would give the company a current ratio of 3.0x. This means that it has enough assets to cover its current liabilities three times over.

## Interpreting the Acid-Test Ratio

Generally, it is generally advisable for businesses to keep their Acid-Test Ratio above 1.0. This will give the business ample liquidity and a healthy financial position. If the ratio falls below 1.0, then it indicates that the company does not have enough liquid assets to meet its current liabilities and should look for alternative sources of financing.

Another factor to consider is the industry in which the company operates. Different industries have different levels of liquidity in their businesses. For example, a retailer will typically have a lower Acid-Test Ratio than a manufacturer due to the amount of inventory they carry.

Overall, the Acid-Test Ratio is an important measure of financial health for businesses and should be monitored closely. A healthy Acid-Test Ratio will give investors and other stakeholders the confidence that the company will be able to pay its current liabilities in the short-term without incurring too much risk.