Cash Ratio

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Measuring liquidity. Explanation of Cash Ratio.

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 on the right.

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 -

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Expert Tips - Cash Ratio Premium   Decapitalization Strategies In Strategy+Business, Issue 46, Spring 2007, BAH VP Justin Petit argues that many companies are sitting on mountains of cash and need a decapitalizati... Usage (application): Things to do when Liquidity is too High       Net Income vs. Cash Flow Cash Flow from Operations is a much better metric to assess a company’s financial health than Net Income, as cash flows are much harder to manipulate ... Usage (application): Financial Statement Analysis       Limitations of Cash Flow From Operations Limitations of Cash Flow From Operations: 1. Cash from operations does not include a charge for use of a firm’s operating capacity and thu... Usage (application): Financial Statement Analysis       Accelerating Cash Flow Velocity To accelerate cash flows, companies should address the following key areas: - Optimize the sales cycle by allowing adjustments for seasona... Usage (application): Cash Management

Resources - Cash Ratio Premium 3 Minute Introduction to Financial Ratio Analysis: Why do it and What are the Main Types? Why financial ratio analysis? 1. To compare the financial health of (similar) compani... Usage (application): Types of Financial Ratios, Financial Ratio Analysis, Financial Ratio Types   Quickly Reading a Profit and Loss Statement and a Balance Sheet This video explains that when we're reading a profit and loss statement as a director we should: - Not focus on the figures as such, but on the E... Usage (application): Profit and Loss Statement Analysis, Analyzing a P&L   Cash Ratio Diagram Download and edit the 12manage PowerPoint model for limited personal, educational and business use. Republishing in intranets, websites, books, magaz... Usage (application): Measuring Liquidity     News Cash Ratio         News Measuring Liquidity         Videos Cash Ratio         Videos Measuring Liquidity         Presentations Cash Ratio         Presentations Measuring Liquidity         More Cash Ratio         More Measuring Liquidity

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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