Acid Test (Liquidity Ratio)

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The Acid Test often appears in business balance sheets to determine the ability of the business to pay its debts. The Acid Test is one of the most used liquidity ratios in business, as well as the current ratio.

The Acid Test Formula is:

(current assets - stock) : current liabilities

The ratio should normally be between 0.5:1 and 1:1 (however this can vary with different markets) for the business to be safe from bankruptcy. Stock is taken away from current assets because it is one of the least liquid current assets.

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