It is an index given by the ratio of the sum of immediate liquidity (IL, represented by current liabilities) and immediate and deferred liquidity (DL), over the current liabilities (CL). The acid test indicates the ability to meet short term financial commitments.

 

index > 1

The company is capable of meeting future cash outflows (arising from the settling of current liabilities) with future revenue (derived from earnings from the most liquid assets of current activities).

 

index = 1

Future revenues from earnings derived from the most liquid assets of current activities is barely sufficient to cover future cash outflows deriving from the settlement of current liabilities.

 

index < 1

Indicates a serious lack of liquidity, as future revenues derived from the most liquid assets of current activities is not sufficient to cover future cash outflows deriving from the settlement of current liabilities.    

 

A positive evaluation can be given whenever the index is above one.

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