The acid-test ratio is another name for the quick ratio, a measure of whether a company can meet its short-term obligations using only its most liquid assets. It divides cash and cash equivalents, marketable securities and accounts receivable by current liabilities, leaving out inventory and prepaid expenses. The calculation, a worked example and benchmarks are covered in the main entry.
Why it is called the acid test
The name comes from the old practice of using acid to test whether a metal was genuine gold: gold resists the acid, while lesser metals react. In the same way, the acid-test ratio is meant to show whether a company's apparent liquidity is real once slow-moving assets such as inventory are set aside. Bankers and credit analysts tend to use the term acid-test ratio, while textbooks and financial data services more often say quick ratio; the formula is the same.
The ratio is a stricter version of the current ratio. A result of 1.0 or more means the company could pay all its current liabilities from quick assets alone, although acceptable levels depend on the industry. Analysts usually read it alongside other liquidity ratios and the trend in operating cash flow, because receivables may be collected slowly and some cash may be restricted. Lenders sometimes write a minimum acid-test ratio into loan covenants as an early warning of liquidity problems.