Cash Ratio

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DEFINITION of 'Cash Ratio'

The ratio of a company's total cash and cash equivalents to its current liabilities. The cash ratio is most commonly used as a measure of company liquidity. It can therefore determine if, and how quickly, the company can repay its short-term debt. A strong cash ratio is useful to creditors when deciding how much debt, if any, they would be willing to extend to the asking party.

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BREAKING DOWN 'Cash Ratio'

The cash ratio is generally a more conservative look at a company's ability to cover its liabilities than many other liquidity ratios. This is due to the fact that inventory and accounts receivable are left out of the equation. Since these two accounts are a large part of many companies, this ratio should not be used in determining company value, but simply as one factor in determining liquidity.

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RELATED FAQS
  1. How can I calculate the cash ratio of a company in Excel?

    The cash ratio determines a company's ability to pay back its current liabilities, or short-term debt, using only its cash ... Read Full Answer >>
  2. Are stocks real assets?

    Stocks are financial assets, not real assets. Financial assets are paper assets that can be easily converted to cash. Real ... Read Full Answer >>
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