What’s the difference between the two main liquidity ratios?

The two main liquidity ratios are current ratio and acid test ratio. Current ratio is current assets/current liabilities and acid test ratio is (current assets - inventories) / current liabilities. Both ratios are useful when analysing the liquidity of a business as they both show how ‘safe’ the business is in order to pay off the short-term debt in the business with the current assets. However, acid test ratio is a lot more useful when analysing the businesses liquidity as it ignores inventories because this is not immediately Accessable as cash until it is sold (therefore it cannot be used to pay off debt immediately). Ideally, this ratio should be above 1, meaning that for every £1 of debt, there is more than £1 of liquid assets, meaning the debt can be paid off without bankruptcy. This of course will vary with different industries. For example, manufacturing industries will have lower acid test ratios than fresh food retailers as a higher level of inventories are needed for manufacturing.