The higher the ratio, the stronger the company's liquidity and financial health, generally speaking.
How the acid-test ratio is used
Similar to the current ratio, which includes all current assets, the quick ratio gives a snapshot of how easily a company can pay its bills.
Since the acid-test ratio only includes cash, marketable securities, and accounts receivables, it gives a good indication of whether a business could pay its short-term liabilities within 90 days.
In general, the higher the ratio, the better for a business, although investors might find that some blue chip companies are able to get away with lower quick ratios because they can keep high accounts payable balances on their balance sheet while collecting receivables faster because they have the power to dictate terms with suppliers and customers.
An acid-test ratio greater than 1 generally indicates that a company's liquidity is stable, while a quick ratio less than 1 might signal that a company could have trouble paying its bills if it were in crisis.
Balance sheet ratios tend to gain more attention when a company is struggling or the economy is doing poorly. For instance, at the start of the COVID-19 pandemic, investors paid close attention to indicators like the acid-test ratio to see if companies could survive the shock of lockdowns.