Definition
The acid-test ratio is a stricter liquidity ratio that excludes less-liquid current assets. It focuses on cash-like assets versus current liabilities.
Formula
Acid-test ratio = (cash + marketable securities + receivables) / current liabilities
Example
If cash + receivables are $900k and current liabilities are $600k, the ratio is 1.5x.
How to use it
- Use it when inventory is significant and you want a stricter liquidity lens.
- Receivables quality matters; aging and bad debt risk can distort the ratio.
- Track the ratio alongside DSO to catch collection slowdowns early.
Common mistakes
- Counting slow or doubtful receivables as liquid.
- Using a single snapshot without trend context.
Measured as
Acid-test ratio = (cash + marketable securities + receivables) / current liabilities
Misused when
- Counting slow or doubtful receivables as liquid.
- Using a single snapshot without trend context.
Operator takeaway
- Use it when inventory is significant and you want a stricter liquidity lens.
- Receivables quality matters; aging and bad debt risk can distort the ratio.
- Track the ratio alongside DSO to catch collection slowdowns early.
- Tie Acid-test Ratio (Quick Ratio) to the same balance-sheet date, scenario, and decision memo you are using elsewhere in the model.
- Document which claims, costs, or adjustments your team includes before comparing numbers across forecasts, covenants, or valuation work.
Next decision
- Read Cash conversion cycle: turn working capital into runway if the decision depends on interpretation, policy, or trade-offs beyond the raw formula.
- Decide whether Acid-test Ratio (Quick Ratio) belongs in cash planning, valuation, or debt monitoring so the number is used in the right model.
Where to use this on MetricKit
Guides
- Cash conversion cycle: turn working capital into runway: A practical guide to the cash conversion cycle (CCC): how AR/AP timing changes cash, how to reduce days outstanding, and why runway depends on working capital.