What Is an Acid Test Ratio?

By Jeremy Bowman – Updated Sep 8, 2025 at 11:28 PM EST

Key Points

Balance sheets illustrate a company's financial stability via assets and liabilities.
The acid-test ratio measures liquidity, with values over 1 indicating strong liquidity.
High acid-test ratios suggest investment safety, especially in economic downturns.
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The balance sheet is a key tool for understanding any business. It provides a synopsis of the company's assets and liabilities, detailing its cash position, debt, where its money is invested, and what makes up the value of the business.

Evaluating a balance sheet isn't always easy, which is why investors use ratios to measure balance sheet strength. One of the more commonly used ratio is the acid-test ratio, or quick ratio.

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Person sitting at a desk and conducting financial analysis. — Image source: Getty Images.

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Bankruptcy

A legal process handled in federal court in which an individual or business can have their debt forgiven or restructured.

If a business faces the threat of bankruptcy or liquidity concerns, investors should take a close look at the balance sheet, using tools like the quick ratio to get a sense of the business's ability to stay afloat.

Often, these stocks are volatile, meaning there's opportunity in finding stocks that are priced as if they're headed toward bankruptcy. If they can avoid bankruptcy and improve their liquidity, their stocks can often deliver multibagging returns.

Alternatively, examining the acid-test ratio can help inform you of stocks to avoid before they start to fall because of bankruptcy concerns. Finding a company with a low quick ratio could be a red flag and help you sell it before it falls.

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About the Author

Jeremy Bowman has been a contributing Motley Fool stock market analyst, covering technology, consumer goods, and macroeconomic trends since 2011. Before The Motley Fool, Jeremy was a newspaper reporter, restaurant manager, and English teacher abroad. He holds a bachelor’s degree in English from Colorado College and a master’s degree in business administration from American University. One of his Motley Fool headlines was briefly featured on Late Night with Stephen Colbert.

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