HOMEPAGE

Cash Ratio

Definition

The Cash Ratio measures a company’s ability to pay its short‑term liabilities using only its most liquid assets: cash and cash equivalents.

$$\text{Cash Ratio}=\frac{\text{Cash + Cash Equivalents}}{\text{Current Liabilities}}$$

Why It Matters

• Most conservative liquidity ratio.
• Shows immediate solvency without relying on receivables or inventory.
• Useful for stress‑testing financial strength.

How to Interpret It

• > 1.0: Company can cover all short‑term liabilities with cash alone.
• 0.5–1.0: Acceptable for most industries.
• < 0.5: Potential liquidity risk.

Example

Cash + Equivalents = $200M Current Liabilities = $400M

Cash Ratio= 200/400=0.5