Canadian Financial, Real Estate and Mortgage Glossary

How often this word is used
50% - Moderately

Acid-Test Ratio

Synonyms:asset and liability score, liability test
Filed Under: financial-banking, investments
Tags: banking, investment

Definition of acid-test ratio

acid-test ratio
1. A ratio used to determine if a company has enough liquidity in quick assets (or short-term assets) to pay its current liabilities without selling inventory. The acid-test ratio is calculated by dividing the sum of a company's cash, accounts receivable and quick assets by its current liabilities. A company with an acid-test ratio less than 1 cannot cover its current liabilities without selling inventory.

Related Terms and Acronyms:

  • current ratio   A method of determining an entity's liquidity and its ability to cover its current liabilities.
  • liabilities   A borrower's debts and legal obligations.
  • liquid assets   Cash and other property that can be converted quickly and easily into cash.
  • long-term liabilities   Money owed over a period longer than 12 months, such as mortgages, bank loans, and other obligations.
  • overall liquidity ratio   A method of determining how easily and quickly a company can sell off assets to pay off its debts.
  • short-term liabilities   Money that you have to pay in less than 12 months, including wages, short-term loans, taxes, credit card balances and long-term loans.
  • solvency   To be able to meet one's financial liabilities in the short or long term.

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