Cash Ratio – Definition, Formula And Example

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Cash Ratio –

Cash Ratio is the one of the three ratios of liquidity ratio which is more conservative than other liquidity ratios because it considers most liquid assets of a company. This ratio shows company’s ability to repay its short term liabilities with most liquid assets which are cash and cash equivalents and marketable securities. This ratio is less popular amongst investor and analysts.

This ratio indicates how much cash does company has on hand to meet its current liabilities.

Cash Ratio Definition

Cash Ratio = Cash + Cash Equivalents / Current Liabilities

Cash Equivalents are cash investments which can be converted into cash within 90 days or less.

Lets take examples,

Lets discuss company A, we can calculate cash and cash equivalents by adding cash with cash equivalents.

Cash Ratio of Company A = Cash & Cash Equivalents / Current Liabilities

= 85 / 70

= 1.21

The ratio of 1.21 means company A has more cash and cash equivalents than current liabilities. It also mean company A is not utilizing its cash effectively to generate profits.

Lets discuss company B,

Cash Ratio of Company B = 60 / 60

= 1

The ratio of 1 means company B can repay its current liabilities by using only cash and cash equivalents.

Lets discuss company C,

Cash Ratio of Company C = 35 / 50

= 0.7

The ratio of 0.7 which means company is not able to repay its current liabilities using cash and cash equivalents.

This ratio is rarely used by investors and analysts. They mostly use current ratio and quick ratio for fundamental analysis.

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