The higher the ratio, the more financially secure a company is in the short term. On the other hand, a high or increasing acid-test ratio generally indicates that a company is experiencing solid top-line growth, quickly converting receivables into cash, and easily able to cover its financial obligations.Click to see full answer. Also asked, what is a good acid test ratio?Generally, the acid test ratio should be 1:1 or higher; however, this varies widely by industry. In general, the higher the ratio, the greater the company’s liquidity (i.e., the better able to meet current obligations using liquid assets).Likewise, why is it called the acid test ratio? The acid-test ratio gets its name from the historic use of acid to test metals for gold. However, if the metal failed the test, it was considered valueless. Today, the acid-test ratio shows a company’s ability to convert its assets into cash to satisfy its immediate liabilities. Hereof, what happens if quick ratio is too high? Quick Ratio Analysis If quick ratio is higher, company may keep too much cash on hand or have a problem collecting its accounts receivable. A quick ratio lower than 1:1 may indicate that the company relies too much on inventory or other assets to pay its short-term liabilities.What happens when acid test ratio increases?On the other hand, a high or increasing acid test ratio indicates a company has faster inventory turnover and cash conversion cycles. This ratio happens when a company is experiencing top-line growth, quickly converting receivables into cash, and are easily able to cover its financial obligations.
