Acid-Test Ratio Calculator: Liquidity Without Inventory

An acid-test ratio calculator, also called a quick ratio calculator, strips inventory out of current assets before comparing what is left to current liabilities, a stricter read on liquidity than the current ratio gives.

How to calculate the acid-test ratio

Subtract inventory from current assets to get quick assets, then divide by current liabilities. A business with 250,000 dollars in current assets and 60,000 dollars of that tied up in inventory has 190,000 dollars in quick assets. Divided by 100,000 dollars in current liabilities, that is an acid-test ratio of 1.9, meaning it could cover its short-term obligations almost twice over without selling a single unit of stock.

Why inventory gets excluded

Inventory is a current asset, but it is not cash, and turning it into cash takes time and is not guaranteed at full value, especially if demand shifts or the stock is seasonal or perishable. The acid-test ratio, sometimes called the quick ratio, strips inventory out to answer a stricter question than the current ratio does: could this business cover its near-term bills using only the assets that are already cash or close to it, such as cash, marketable securities and receivables.

Acid-test ratio versus current ratio

The two ratios tell a similar story from different angles, and reading them together is more informative than either alone. A retailer or manufacturer carrying heavy inventory can show a comfortable current ratio while its acid-test ratio is much tighter, which is a useful early warning that liquidity depends on how fast that stock actually sells. Software and services businesses, which usually carry little or no inventory, tend to see the two ratios sit close together.