Acid Test Ratio

Tax Glossary Definition

Acid Test Ratio

Acid Test Ratio (Quick Ratio) – A stringent liquidity measure that evaluates a company’s capacity to meet its short-term liabilities using only its most liquid assets—cash, marketable securities, and accounts receivable—while excluding inventory. A higher ratio reflects stronger liquidity and a lower probability of short-term financial distress.

Example: If quick assets amount to ₹4,00,000 and current liabilities total ₹2,00,000, the Acid Test Ratio = 2:1, indicating a strong liquidity position.

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