The quick test ratio, also known as the acid test ratio or the liquidity ratio, is an excessively difficult test of a company's liquidity position. It measures current assets, excluding inventory, compared to current liabilities.
The Quick Test Ratio (also called the Acid Test or Liquidity Ratio) is the most excessive and difficult test of a company's financial strength and
liquidity. To calculate the quick ratio, take the current assets and subtract the inventory (current assets minus inventory is often referred to as the "quick assets"). What you are left with are the items that can be converted into cash immediately. Divide the result by the
current liabilities. The answer is the Quick Test ratio, one of the most difficult
balance sheet tests.
What does this tell you? It is a reflection of the liquidity of a business. The Quick Test ratio does not apply to the handful of companies where inventory is almost immediately convertible into cash (such as McDonalds, Wal-Mart, etc.) Instead, it measures the ability of the average company to come up with cold, hard cash literally in a matter of hours or days. Since inventory is rarely sold that fast in most businesses, it is excluded.
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This page is part of Investing Lesson 3 - Understanding the Balance Sheet. To go back to the beginning, see the Table of Contents. If you have already read this lesson, you can skip directly to the Balance Sheet Quiz.
