Acid-Test Ratio
Definition
A stricter liquidity measure than the current ratio, excluding inventory from current assets because it may not convert quickly to cash. Also known as the quick ratio.
Formula
Acid-test ratio = (Current assets − Inventory) ÷ Current liabilities
Related Terms in Financial Analysis
Cash Ratio
The most conservative liquidity ratio, comparing only cash and cash equivalents to current liabilities. It shows whether a business could cover short-term debts without relying on receivables or inventory.
Debt Ratio
Total liabilities as a proportion of total assets, showing how much of a business is financed by debt rather than equity. A higher ratio means greater financial leverage and risk.
Interest Coverage Ratio
A measure of how comfortably a business can pay interest on its debt from operating profit. A higher ratio means more cushion; a ratio near one signals that earnings barely cover interest.
Debt Service Coverage Ratio (DSCR)
A measure lenders use to see whether operating income covers total debt obligations, including principal and interest. A DSCR above one means income exceeds debt payments.
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