Cash Ratio Calculator
Calculate the cash ratio to assess a company's liquidity and ability to meet short-term obligations using only cash and cash equivalents. This is the most conservative measure of liquidity.
Cash & Cash Equivalents
Current Liabilities
Ratio Results
Cash Ratio:
0.00
Cash Position:
$0.00
Liquidity Rating:
N/A
Financial Health
vs Industry Average:
N/A
Risk Assessment:
N/A
Working Capital Status:
N/A
Business Insights
Cash Management:
N/A
Emergency Fund:
N/A
Investment Recommendation:
N/A
Understanding Cash Ratio
The cash ratio is a liquidity ratio that measures a company's ability to pay off its current liabilities using only cash and cash equivalents. It's the most conservative measure of liquidity available.
What is Cash Ratio?
Definition
- Cash and cash equivalents divided by current liabilities
- Most conservative liquidity measure
- Shows immediate payment capacity
- Used in financial analysis and lending
Formula
- Cash Ratio = (Cash + Cash Equivalents) ÷ Current Liabilities
- Expressed as a decimal or percentage
- Higher ratio indicates better liquidity
- Compared to industry benchmarks
Interpreting Cash Ratios
Ratio Guidelines
Understanding ratio values
Strong Liquidity (0.50+):
- Excellent short-term liquidity
- Very low risk of default
- Strong financial position
- Conservative cash management
Adequate Liquidity (0.20-0.50):
- Good liquidity position
- Manageable short-term obligations
- Balanced risk profile
- Standard financial health
Moderate Liquidity (0.10-0.20):
- Fair liquidity position
- Some short-term risk
- Requires monitoring
- Potential working capital issues
Weak Liquidity (Below 0.10):
- Poor liquidity position
- High short-term risk
- Potential cash flow problems
- Requires immediate attention
Industry Benchmarks
| Industry | Strong | Average | Weak |
|---|---|---|---|
| Technology | 0.60+ | 0.30-0.60 | <0.30 |
| Manufacturing | 0.40+ | 0.20-0.40 | <0.20 |
| Retail | 0.35+ | 0.15-0.35 | <0.15 |
| Services | 0.45+ | 0.25-0.45 | <0.25 |
Cash vs Other Liquidity Ratios
Current Ratio:
- Current assets ÷ current liabilities
- Includes inventory and receivables
- Less conservative than cash ratio
- More commonly used
Quick Ratio:
- (Cash + Receivables) ÷ current liabilities
- Excludes inventory
- More conservative than current ratio
- Focuses on liquid assets
Components of Cash Ratio
Cash:
- Currency and coin
- Demand deposits
- Checking accounts
- Petty cash
Cash Equivalents:
- Treasury bills (maturity < 3 months)
- Commercial paper
- Money market funds
- Short-term government bonds
Current Liabilities
Short-term obligations:
- Accounts payable
- Short-term debt
- Accrued expenses
- Taxes payable
Other current liabilities:
- Current portion of long-term debt
- Customer deposits
- Unearned revenue
- Dividends payable
Improving Cash Ratio
Increase Cash:
- Improve cash flow from operations
- Reduce unnecessary expenses
- Accelerate receivables collection
- Manage inventory efficiently
Reduce Liabilities:
- Extend payment terms with suppliers
- Negotiate better credit terms
- Pay down short-term debt
- Optimize working capital
Cash Management Strategies
Cash Flow Forecasting:
- Predict cash inflows and outflows
- Identify cash flow gaps
- Plan for seasonal variations
- Maintain adequate cash reserves
Working Capital Management:
- Optimize inventory levels
- Improve receivables collection
- Negotiate payable terms
- Balance liquidity and profitability
Risk Assessment
Liquidity Risk:
- Inability to meet short-term obligations
- Cash flow interruptions
- Supplier and creditor pressure
- Potential business failure
Opportunity Cost:
- Excess cash earns low returns
- Missed investment opportunities
- Inflation erodes purchasing power
- Balance liquidity vs profitability
Cash Ratio in Different Contexts
For Lenders:
- Assessment of repayment capacity
- Risk evaluation for loans
- Covenant compliance monitoring
- Credit limit determination
For Investors:
- Financial health indicator
- Risk assessment
- Comparative analysis
- Valuation considerations
Key Takeaways for Cash Ratio
- Cash ratio measures a company's ability to pay current liabilities with cash and cash equivalents
- It's the most conservative liquidity ratio, excluding inventory and receivables
- Higher ratios indicate stronger liquidity but may suggest inefficient cash management
- The ratio varies by industry and should be compared to relevant benchmarks
- Cash ratio is used by lenders and investors to assess financial health and risk
- Companies can improve the ratio by increasing cash or reducing current liabilities
- The ratio should be analyzed alongside other financial metrics for comprehensive assessment
- Context matters - consider industry norms, company size, and business cycle