Cash Ratio

Key Question

Have you enough cash or cash equivalents to cover Current Liabilities?

Cash Ratio-2

The cash ratio is an indicator of a company’s liquidity that further refines both the current ratio and the quick ratio by measuring the amount of cash, cash equivalents or invested funds there are in current assets to cover current liabilities.

Cash Ratio = (Cash + Cash Equivalents + Invested Funds) / Current Liabilities

The cash ratio is the most stringent and conservative of the three short-term liquidity ratios (current, quick and cash). It only looks at the most liquid short-term assets of the company, which are those that can be most easily used to pay off current obligations. It also ignores inventory and receivables, as there are no assurances that these two accounts can be converted to cash in a timely matter to meet current liabilities.

Very few companies will have enough cash and cash equivalents to fully cover current liabilities, which isn’t necessarily a bad thing, so don’t focus on this ratio being above 1:1.

While providing an interesting liquidity perspective, the usefulness of this ratio is limited.