Acid Test Ratio Calculator

Written by:
PK

Below is an acid test ratio calculator. Enter a company's current assets, inventories, prepaid costs, and current liabilities to see the acid test ratio.

(The acid test ratio is sometimes used interchangeably with the quick ratio. However, this tool is more aggressive than our quick ratio tool).

Acid Test Ratio Calculator

What is a company's acid test ratio?

An acid test ratio is a liquidity ratio that models a company's ability to pay its liabilities due in the following 12 months using assets currently on the books minus hard (or impossible) to liquidate assets such as inventory and prepaid liabilities. A number above 1 shows that a company could meet its short term liquidity needs in its current state.

In GAAP accounting, it's the equivalent of the quick ratio, which attempts to strip out assets that can be sold quickly to pay off current liabilities. In other accounting systems or small company (or non-compliant) books, you should attempt to strip out other not-easily-to-liquidate current assets, for example if companies list office supplies, prepaid insurance contracts, prepaid taxes, biological assets, and so-on.

Note that, for the most part, the acid test ratio and quick ratio are used interchangeably.

Acid Test Ratio Formula

The acid test ratio formula is:

acid\ test\ ratio=\frac{current\ assets-inventories-prepaid\ costs}{current\ liabilities}

Where:

  • Current Assets – short-term assets listed on the company's balance sheet
  • Inventories – currently held inventories, considered slow assets (and netted out of the ratio). Listed on the balance sheet
  • Prepaid costs – already paid costs for goods and services in future quarters. As these are impossible to liquidate quickly (or at all?), they are netted out of the acid test ratio. Listed on the balance sheet
  • Current Liabilities – short-term liabilities listed on the balance sheet

Other Liquidity Calculators

Liquidity ratios guess how well a company can handle debts and liabilities due in the next twelve months. Try some other liquidity calculators here:

      

PK

PK started DQYDJ in 2009 to research and discuss finance and investing and help answer financial questions. He's expanded DQYDJ to build visualizations, calculators, and interactive tools.

PK is in his mid-30s and works and lives in the Bay Area with his wife, two kids, and dog.

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