What are the Key Problems with Acid Test Ratio Analysis of a Company (or an Industry)?
The following are sometimes quoted as potential problems with the Acid Test Ratio (ATR): • Many investors often quote a requirement of 1 for the ATR; however this expectation will vary by industry and company, depending on the specific risks. • It needs to be considered in context. For example comparing the Acid Test Ratio values over a period of time, or by comparing the ATR with the Working Capital Ratio. • This ratio uses balance sheet values and is therefore only a snapshot. It simply provides a picture of the situation at the close of play on one specific day.
