Acid test / liquid assets ratio

Another measure of a company's liquidity is the acid test/liquid assets ratio [Acid test/liquid assets ratio: The ability to meet short-term debts without selling stock. ]. This deducts the value of currently held stock to find the company's ability to meet its liabilities immediately. Stock is the least liquid current asset so it is deducted to give a more realistic view of the company's liquidity.

Learn this equation. You may be asked to calculate the acid test ratio in an exam.

Acid test / liquid assets = ^{current assets - closing stock} / _{current liabilities}

This shows us that Go Faster can afford to pay their short-term debts three times over immediately without selling any stock.

Now try a Test Bite