Cash Ratio Calculator
This tool calculates the Cash Ratio, a key liquidity metric that measures a company's ability to pay off its short-term obligations using only cash and cash equivalents.
Enter the total value of Cash & Cash Equivalents and the total value of Current Liabilities in the fields below.
Enter Financial Values
Understanding the Cash Ratio
What is the Cash Ratio?
The Cash Ratio is one of the most conservative liquidity ratios. It assesses a company's ability to meet its short-term obligations (current liabilities) using only its most liquid assets: cash and cash equivalents. Unlike the Current Ratio or Quick Ratio, it excludes less liquid assets like accounts receivable and inventory.
Cash Ratio Formula
The formula is straightforward:
Cash Ratio = (Cash + Cash Equivalents) / Current Liabilities
A ratio of 1.0 means the company has exactly enough cash on hand to pay off all its current liabilities immediately.
Interpretation
Generally, a higher Cash Ratio indicates stronger liquidity. However, an excessively high ratio might mean the company isn't investing its cash efficiently. The "ideal" ratio varies by industry and economic conditions.
- Ratio > 1: The company has more cash than current liabilities. Very strong immediate liquidity.
- Ratio = 1: The company's cash exactly equals its current liabilities. Strong immediate liquidity.
- Ratio < 1: The company has less cash than current liabilities. It would need to liquidate other assets or secure funding to cover all current liabilities immediately.
Cash Ratio Examples
Example 1: Strong Liquidity
Scenario: A company has significant cash reserves.
Known Values: Cash & Cash Equivalents = $150,000, Current Liabilities = $100,000.
Formula: Cash Ratio = Cash / Current Liabilities
Calculation: Cash Ratio = $150,000 / $100,000 = 1.5
Result: Cash Ratio = 1.50
Conclusion: The company has $1.50 in cash for every $1 of current liabilities, indicating very strong immediate liquidity.
Example 2: Adequate Liquidity (Ratio < 1)
Scenario: A common scenario where cash doesn't cover all short-term debts.
Known Values: Cash & Cash Equivalents = $60,000, Current Liabilities = $120,000.
Formula: Cash Ratio = Cash / Current Liabilities
Calculation: Cash Ratio = $60,000 / $120,000 = 0.5
Result: Cash Ratio = 0.50
Conclusion: The company has $0.50 in cash for every $1 of current liabilities. It relies on converting other current assets (like receivables) to cover all short-term debts.
Example 3: Zero Cash
Scenario: A company has no cash on hand but has liabilities.
Known Values: Cash & Cash Equivalents = $0, Current Liabilities = $50,000.
Formula: Cash Ratio = Cash / Current Liabilities
Calculation: Cash Ratio = $0 / $50,000 = 0
Result: Cash Ratio = 0.00
Conclusion: The company cannot cover any of its current liabilities with cash alone.
Example 4: High Cash, Few Liabilities
Scenario: A very conservative company or one holding cash for a specific purpose.
Known Values: Cash & Cash Equivalents = $500,000, Current Liabilities = $20,000.
Formula: Cash Ratio = Cash / Current Liabilities
Calculation: Cash Ratio = $500,000 / $20,000 = 25
Result: Cash Ratio = 25.00
Conclusion: An extremely high ratio, suggesting high immediate liquidity but potentially inefficient cash management if not justified by specific plans.
Example 5: Equal Cash and Liabilities
Scenario: Cash exactly matches current short-term debt.
Known Values: Cash & Cash Equivalents = $75,000, Current Liabilities = $75,000.
Formula: Cash Ratio = Cash / Current Liabilities
Calculation: Cash Ratio = $75,000 / $75,000 = 1
Result: Cash Ratio = 1.00
Conclusion: The company has exactly enough cash to cover its immediate obligations.
Example 6: Small Values
Scenario: Calculation with smaller figures.
Known Values: Cash & Cash Equivalents = $500, Current Liabilities = $2,000.
Formula: Cash Ratio = Cash / Current Liabilities
Calculation: Cash Ratio = $500 / $2,000 = 0.25
Result: Cash Ratio = 0.25
Conclusion: Low cash relative to liabilities.
Example 7: Large Values
Scenario: Calculation with larger figures.
Known Values: Cash & Cash Equivalents = $5,000,000, Current Liabilities = $3,500,000.
Formula: Cash Ratio = Cash / Current Liabilities
Calculation: Cash Ratio = $5,000,000 / $3,500,000 ≈ 1.43
Result: Cash Ratio = 1.43
Conclusion: Strong cash position relative to current liabilities.
Example 8: Using Decimal Values
Scenario: Calculation involving cents.
Known Values: Cash & Cash Equivalents = $12,550.75, Current Liabilities = $10,200.50.
Formula: Cash Ratio = Cash / Current Liabilities
Calculation: Cash Ratio = $12,550.75 / $10,200.50 ≈ 1.23
Result: Cash Ratio = 1.23
Conclusion: The company has about $1.23 in cash per dollar of current liabilities.
Example 9: Just Covering Liabilities
Scenario: Ratio is slightly above 1.
Known Values: Cash & Cash Equivalents = $100,001, Current Liabilities = $100,000.
Formula: Cash Ratio = Cash / Current Liabilities
Calculation: Cash Ratio = $100,001 / $100,000 = 1.00001
Result: Cash Ratio = 1.00
Conclusion: Ratio is essentially 1.00, showing exact coverage by cash.
Example 10: Very Low Ratio
Scenario: Company with significant current liabilities but little cash.
Known Values: Cash & Cash Equivalents = $1,000, Current Liabilities = $250,000.
Formula: Cash Ratio = Cash / Current Liabilities
Calculation: Cash Ratio = $1,000 / $250,000 = 0.004
Result: Cash Ratio = 0.00
Conclusion: A very low ratio (effectively zero when rounded), indicating potential difficulty meeting immediate obligations without relying on other assets or financing.
Frequently Asked Questions about the Cash Ratio
1. What is the Cash Ratio used for?
It's used to measure a company's most immediate liquidity – its ability to pay off short-term debts using only readily available cash and cash equivalents.
2. How is the Cash Ratio different from the Quick Ratio or Current Ratio?
The Cash Ratio uses only cash and cash equivalents. The Quick Ratio adds accounts receivable. The Current Ratio includes all current assets (including inventory). The Cash Ratio is the most stringent measure of immediate liquidity.
3. Is a high Cash Ratio always good?
A high ratio means strong liquidity, which is generally good. However, an *exceptionally* high ratio might suggest the company is holding too much idle cash that could be invested for better returns, potentially indicating inefficient asset management.
4. What does a Cash Ratio of less than 1.0 mean?
It means the company's cash and cash equivalents are not enough to cover all of its current liabilities immediately. The company would need to sell inventory, collect receivables, or obtain funding to meet all obligations as they become due.
5. Can the Cash Ratio be zero?
Yes, if a company has no cash or cash equivalents but still has current liabilities, the ratio will be zero (0 / Liabilities = 0).
6. Can the Cash Ratio be negative?
No, the values for Cash, Cash Equivalents, and Current Liabilities are typically non-negative, so the resulting ratio cannot be negative.
7. What values are included in "Cash and Cash Equivalents"?
Typically includes physical cash, funds in checking and savings accounts, money market funds, short-term government bonds, and other highly liquid investments that can be quickly converted to cash (usually within 90 days).
8. What are "Current Liabilities"?
These are a company's financial obligations that are due within one year or one operating cycle, whichever is longer. Examples include accounts payable, short-term loans, salaries payable, and the current portion of long-term debt.
9. What is considered a "good" Cash Ratio?
There is no universal "good" ratio. It depends heavily on the industry (some industries have stable cash flows and can operate with lower ratios), the company's business model, and current economic conditions. Analysts compare the ratio against industry benchmarks and the company's historical performance.
10. Does this calculator handle non-integer values?
Yes, the input fields accept decimal numbers, allowing for calculations with precise financial figures including cents.
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