Cash Ratio The cash ratio measures a company's ability to meet short-term liabilities using only its most liquid assets: cash and cash equivalents. It is a conservative liquidity metric used by lenders and investors to assess immediate solvency. Formula Cash Ratio = (Cash + Cash Equivalents) / Current Liabilities Explore More Resources
Cash equivalents typically include marketable securities and other assets that can be quickly converted to cash. What it indicates
* A ratio greater than 1: the company has more cash and equivalents than current liabilities and can cover short-term debts immediately.
* A ratio equal to 1: cash equals short-term liabilities.
* A ratio less than 1: the company does not have enough cash and equivalents on hand to cover all short-term liabilities.
Because it excludes receivables and inventory, the cash ratio is more conservative than the current or quick ratios. Typical acceptable values vary by industry; many firms fall between about 0.5 and 1.0. Explore More Resources
Example If a company holds $30.2 billion in cash and $23.5 billion in marketable securities (total $53.7 billion) and has $123 billion in current liabilities:
Cash Ratio = $53.7B / $123B ≈ 0.43 Interpretation: The company relies on credit terms, working capital management, or retained liquidity for operations rather than holding large cash buffers. Explore More Resources
Limitations
* Narrow focus: ignores receivables and inventory, which can be significant sources of near-term liquidity.
* Industry differences: some sectors operate routinely with low cash reserves or high short-term financing.
* Timing and seasonality: single-period snapshots can misrepresent liquidity around large inflows or seasonal swings.
* Excess cash: an unusually high cash ratio can signal inefficient capital use (cash that could be invested or returned to shareholders).
* Best used comparatively: across peers, industry averages, or the same company over time.
What is a good cash ratio?
* Generally, ≥1 indicates the capacity to pay all short-term debts with cash and equivalents.
* Ratios under 0.5 may be viewed as risky, though industry norms matter.
* A very high ratio may reflect conservative management or poor capital allocation.
How to improve the cash ratio Increase cash and equivalents:
- Speed up receivables collection.
- Reduce or liquidate noncore assets.
- Retain earnings rather than paying out cash. Reduce current liabilities:
- Refinance short-term debt as long-term.
- Negotiate extended supplier payment terms.
- Cut discretionary expenses and pay down short-term obligations. Explore More Resources
Operational improvements:
- Improve inventory turnover.
- Time large expenditures to preserve liquidity. Bottom line The cash ratio is a strict measure of immediate liquidity, useful for assessing how well a company could meet short-term obligations without selling other assets. It should be interpreted alongside other ratios, industry norms, and trends over time to provide a complete picture of financial health. Explore More Resources