Acid-Test Ratio

Acid-Test Ratio - The acid-test ratio is the value of a company's total assets, less the value of their inventory, compared to the total value of their current liabilities. By using this ratio, which is a stringent measure, you are able to tell how well the company is meeting its obligations over a short-term period. So, basically this ratio only takes into account how much liquid cash is available, inventory is not cashable therefore it is subtracted from the liquid cash value, creditors can tell how much short term debt the company is carrying and how quickly it can be paid by selling all the company's current assets on short notice.