What Does the Acid Test Ratio (ATR) Ratio Imply to the Investor?
Investors will look at the relative size of the Acid Test Ratio compared with other organizations. This is often viewed as an important indicator of a company’s financial strength and its ability to meet short-term obligations. It excludes inventory since inventory is often viewed as difficult to sell quickly at a reasonable value. A higher numerical number would indicate a better liquidity, when compared with another company; however detailed analysis is always needed. Investors are often quoted as saying they believe the ratio should be at least 1.0.
