test ratio is a financial ratio that is also referred to as the quick ratio
, and bears similarities to the current ratio
, but is considered a more reliable indicator of a company's ability to meet its short-term financial obligations
. Inventory is in some cases very hard to liquidate and this is not taken into account when using the current ratio
so this ratio deducts inventory from the assets before calculating the ratio. This ratio is useful because it gives an indication of the company's ability to pay off under the worst possible conditions.
Current assets - inventories
Inventories that are hard to liquidate are not necessarily an unwanted factor. Consider a Whiskey distillery
, where the "inventory
" has to sit in their stores
for up to 21 years.