The definition of acid test, known in English as quick ratio, is the accounting ratio that indicates the liquidity o solvency of a short-term company. The assets of the business and how they are financed are reflected in the company's balance sheet. You can check if there is any mismatch in the accounts if there are many differences between what the company has in the short term and what it owes.
Cálculo of the acid test
It is very simple and fast to calculate the acid test. The result says a lot about the situation of the treasury Of a company. In general, when this ratio is weak, it ends up being penalized by the market.
It is an indicator to know the ability to pay in the short term, showing solvency through current assets between current liabilities
Acid test = (Current assets - Inventories) / Current liabilities
Current assets are made up of those items of monetizable assets, which can be turned into liquid in a maximum period of one year. It is the case of:
- Customers and debtors: they are collected after a few weeks or months.
- Inventories: they are bought to transform them and commercialize them in exchange for liquidity.
- Cash: present in financial entities.
- Short-term investments and credits, maturing in the operating cycle.
On the other hand, current or current liabilities are the liability items that are monetizable. Between them:
- Suppliers and creditors.
- Short term debts.
As we have just verified, the acid test maintains a relationship between assets and short-term debts, without assessing the stocks Company.
When the acid test is less than one, this means that current liabilities are excessive and the company should sell a part of its inventories to bear short-term debts without problems.
Learn to interpret the acid test