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What is the Cash Ratio? Definition
The Cash Ratio method is a formula for measuring the liquidity of a company by calculating the ratio between all cash and cash equivalent assets and all current liabilities.
It excludes both inventory and accounts receivable in comparison to the Current Ratio.
The Cash Ratio model measures only the most liquid of all assets against current liabilities, and is therefore seen as the most conservative of the three liquidity ratios.
Calculation of Cash Ratio
For the Cash Ratio formula, see the picture.
This Cash ratio is also known as the Liquidity Ratio and Cash Asset Ratio.
The formula is an indicator of the extent to which a company can pay its current liabilities. Without relying on the sale of inventory, and without relying on the receipt of accounts receivables.
A thing to remember when you are using the Cash Ratio formula is, that it ignores the timing of both cash received and cash paid out.
Book: Steven M. Bragg - Business Ratios and Formulas : A Comprehensive Guide
Book: Ciaran Walsh - Key Management Ratios
Compare with: Current Ratio | Quick Ratio | Z-Score | Cash Flow from Operations | Dividend Payout Ratio | Discounted Cash Flow | Free Cash Flow | Economic Value Added | CFROI | Return on Invested Capital | Economic Margin
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