What is Acid-Test Ratio (Quick Ratio)?

The Acid-Test Ratio, also known as the Quick Ratio, is a stringent liquidity metric that measures a company's ability to meet its short-term obligations using only its most liquid assets—those that can be converted to cash very quickly. It provides a more conservative view than the current ratio by excluding inventory from current assets, as inventory may not be easily or quickly sold.

For Startups: For startups, especially in the D2C or hardware space, the quick ratio is a critical health indicator. A low ratio can signal a dangerous over-reliance on inventory to meet short-term liabilities like payroll and supplier payments. Investors scrutinize this ratio to assess a startup's ability to weather a sudden drop in sales without being forced into a fire sale of its inventory.

Calculation: Quick Ratio = (Current Assets - Inventory) / Current Liabilities

Example: A company has ₹50 Lakhs in current assets (including ₹20 Lakhs of inventory) and ₹25 Lakhs in current liabilities. Its quick ratio is (₹50L - ₹20L) / ₹25L = 1.2. This indicates it has ₹1.2 of highly liquid assets for every ₹1 of short-term debt.