Companies with ratios of less than 1 cannot pay their current liabilities and should be looked at with extreme caution. Furthermore, if the acid-test ratio is much lower than the working capital ratio, it means current assets are highly dependent on inventory. Retail stores are examples of this type of business.
The term comes from the way gold miners would test whether their findings were real gold nuggets. Unlike other metals, gold does not corrode in acid; if the nugget didn't dissolve when submerged in acid, it was said to have passed the acid test. If a company's financial statements pass the figurative acid test, this indicates its financial integrity.
Investment dictionary. Academic. 2012.
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acid test ratio — Also known as the quick ratio. An accounting ratio designed to test the short term insolvency of a company. This ratio is usually calculated as current assets (with the exception of stocks) divided by creditors falling due within one year.… … Law dictionary
Acid Test Ratio — Liquiditätsgrade sind insbesondere in der Unternehmensfinanzierung und der Finanzbuchhaltung verwendete betriebswirtschaftliche Kennzahlen, mit denen die Fähigkeit eines Unternehmens, seinen Zahlungsverpflichtungen fristgerecht nachzukommen,… … Deutsch Wikipedia
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acid test ratio — / æsɪd test reɪʃɪəυ/ noun same as liquidity ratio … Dictionary of banking and finance
Acid-test ratio — Also called the quick ratio, the ratio of current assets minus inventories, accruals, and prepaid items to current liabilities. The New York Times Financial Glossary … Financial and business terms
acid test ratio — a ratio of cash, receivables, and marketable securities to current liabilities, used in determining credit risks. * * * … Universalium
acid-test ratio — See: liquid ratio … Accounting dictionary
acid-test ratio — See liquid ratio … Big dictionary of business and management
acid test ratio — a ratio of cash, receivables, and marketable securities to current liabilities, used in determining credit risks … Useful english dictionary