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Cash Ratio

Definition Of Cash Ratio:

The cash ratio is a financial ratio that compares a company's cash and cash equivalents (for example, marketable securities sold to generate cash flow) to its current liabilities, such as short-term debt. Cash ratios are a form of liquidity ratio that assesses a company's working capital and ability to pay bills in the normal course of business. The cash asset ratio is a term that is used occasionally.

If the ratio is more than one, does this imply that there is inefficiency in employing capital to maximize profits or that the market is saturated?

If the ratio is less than one, does this imply that the firm has used its cash efficiently or that it has not earned enough sales to generate more cash?


Cash Ratio Forumla


Cash & Cash Equivalent > Current Liabilities that suggests the company has more cash (in terms of the ratio) than it needs to pay off its present liabilities. It's not usually a favorable scenario to be in because it means the company hasn't fully utilized its assets.

Cash & Cash Equivalent = Current Liabilities this suggests the company has enough cash on hand to pay off its current debts.

Cash & Cash Equivalent < Current Liabilities in terms of the firm's standpoint, this is the appropriate scenario to be in. Because this indicates that the company has made good use of its assets in order to generate revenues.

Although there is no perfect ratio, a ratio of at least 0.5 to 1 is often desired.

Where do we find the information for this ratio

Cash & Cash Equivalents: Balance Sheet

Short-Term Investments: Balance Sheet

Current Liabilities: Balance Sheet

Pros and Cons-


  • It aids in the evaluation of a company's cash position. It aids in identifying a company's near-term financial strength based on its most liquid kind of assets, namely cash. As a result, it is obvious that the greater the ratio, the more stable the business is.

  • It also aids in comprehending a company's growth strategy or prospects. A higher ratio number suggests that the company has a lot of room for expansion through mergers and acquisitions. A lower figure, on the other hand, suggests that there is little room for growth.

  • Because it evaluates liquidity based on the assets that can be changed into cash the most quickly - cash and cash equivalents – it is believed to be more cautious and rigorous than other liquidity ratios such as the current ratio and quick ratio.


  • There is a lot of confusion over which instruments can be termed cash equivalents. As a result of this ambiguity, the results can be misleading.

  • It ignores the impact of the crisis on securities that would otherwise be easily sold. Even though it only considers the most liquid type of assets, even cash equivalents are difficult to trade during the crisis.

  • The cash ratio is rarely employed in financial analysis since it is not practical for a corporation to maintain such high amounts of cash and cash equivalent assets to pay current liabilities.


Q1)- Current Assets - 134,836,000

Current Liabilities - 125,481,000

Cash & Cash Equivalents - 34,940,000

Account Receivables - 51,506,000

Short-Term Investments - 27,699,000

Cash Ratio = (Cash & Cash Equivalents + Short-Term Investments) / Current Liabilities

= 34,940,000 + 27,699,000 / 125,481,000


Cash Ratio Example

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