Acid Test Ratio

AKA: The Quick Ratio.

"Quick! How liquid are we?" The acid test, or quick ratio, is a measure of how well (or not-so-well) a company is positioned to be able to quickly pay off the bills it owes, i.e. its liabilities.

Why the quickly in there? Because the assets used to pay off the liabilities need to be quickly available assets, like cash or bank CDs or publicly traded stocks or bills the company will collect in the next 90 days or so. The company likely owns other assets, like a tractor-smelting company, but like…is it really going to sell that smelter to then pay off its bill to U.S. Steel for, uh.. steel?

Ok…the actual ratio looks like this:

(Cash + sellable securities + money people owe the company) / (liabilities)

So basically, the Quick Ratio compares your total liquid assets to how much you owe. It's important to note that you don't count your current inventory as part of your assets, as it's typically hard to sell everything you have right this moment, and then not at a big discount. The higher the quick ratio, the healthier the liquidity position.

Another good way to test your liquidity? Stand in front of a radiator and see how quickly you evaporate.