A financial ratio that is originally derived from the current ratio by omitting inventory from current assets:
Inventory is the least liquid asset as it conversion to cash would come at a cost (time and below-market clearance price). In general, large inventories are often an indicator of short-term trouble (either sales were overestimated or products were overproduced), where the company is said to have tied up a considerable portion of liquidity in a stacked-up inventory. Suppose a company has $70,000, $50,000, and $40,000 in current assets, current liabilities and inventory, respectively. Its acid-test ratio is then:
Acid-test ratio = (70,000- 40,000)/50,000 = 0.6 times
This ratio is also known as a quick ratio.
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