The cash ratio measures a company's ability to cover its current liabilities using its most liquid cash and cash-equivalent resources. Unlike broader liquidity ratios, it does not normally rely on inventory or receivables, making it a conservative view of short-term liquidity.
Quick Answer
Cash Ratio = Cash and Cash Equivalents Γ· Current Liabilities
Inputs Explained
Cash and cash equivalents generally include cash on hand, bank balances, and qualifying short-term highly liquid investments. Current liabilities are obligations expected to be settled within the applicable short-term period, commonly one year.
How to Use the Cash Ratio Calculator
- Enter the relevant cash and cash-equivalent balance.
- Enter total current liabilities for the same reporting date.
- Divide cash resources by current liabilities to obtain the ratio.
- Compare the result with the company's history and industry context.
Worked Examples
Example 1
A business has $80,000 in cash and $100,000 in current liabilities. Cash ratio = 80,000 Γ· 100,000 = 0.80.
Example 2
With $150,000 of cash and $100,000 of current liabilities, the ratio is 1.50. The company has $1.50 of cash and cash equivalents for every $1 of current liabilities.
Example 3
If cash is $40,000 and current liabilities are $160,000, the ratio is 0.25.
Cash Ratio Examples
| Cash & Equivalents | Current Liabilities | Cash Ratio |
|---|---|---|
| $50,000 | $100,000 | 0.50 |
| $100,000 | $100,000 | 1.00 |
| $200,000 | $100,000 | 2.00 |
How to Read the Result
A ratio of 1.00 means cash and cash equivalents equal current liabilities. A result below 1.00 means cash alone is less than current liabilities, while a result above 1.00 means cash exceeds current liabilities. The ratio should not be interpreted in isolation because businesses can have different payment cycles, access to credit, and working-capital structures.
Cash Ratio vs Current Ratio
The current ratio generally includes current assets such as receivables and inventory. The cash ratio is narrower because it focuses on cash and cash equivalents. A company can therefore have a healthy current ratio while showing a lower cash ratio.
Common Mistakes
- Using total assets instead of cash and cash equivalents.
- Using total liabilities instead of current liabilities.
- Mixing balance-sheet dates.
- Treating a particular ratio as universally good or bad without industry context.
Important
This calculator is for educational and general informational purposes and is not investment, accounting, or financial advice. Definitions and classifications can vary by accounting framework. Use the company's reported financial statements and qualified professional guidance for important analysis.