Cash Ratio


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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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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  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. How do I read and analyze an income statement?

    The income statement, also known as the profit and loss (P&L) statement, is the financial statement that depicts the ... Read Full Answer >>
  3. Does working capital include prepaid expenses?

    The calculation for working capital includes any prepaid expenses that are due within one year, since such prepaid expenses ... Read Full Answer >>
  4. Does working capital include short-term debt?

    Short-term debt is considered part of a company's current liabilities and is included in the calculation of working capital. ... Read Full Answer >>
  5. Do dividends affect working capital?

    Regardless of whether cash dividends are paid or accrued, a company's working capital is reduced. When cash dividends are ... Read Full Answer >>
  6. Why is working capital management important to a company?

    Proper management of working capital is essential to a company’s fundamental financial health and operational success as ... Read Full Answer >>

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