The
acid test ratio is a financial ratio that is also referred to as the
quick ratio, and bears similarities to the
current ratio, but is considered a more reliable indicator of a company's ability to meet its
short-term financial obligations. Inventory is in some cases very hard to liquidate and this is not taken into account when using the
current ratioso this ratio deducts inventory from the assets before calculating the ratio. This ratio is useful because it gives an indication of the company's ability to pay off under the worst possible conditions.
The formula:
Current assets - inventories
-------------------------------
current liabilities
Inventories that are hard to liquidate are not necessarily an unwanted factor. Consider a
Whiskey distillery, where the "
inventory" has to sit in their
stores for up to 21 years.