A:

There are other liquidity measures that can be used as an alternative to the cash ratio, including the current ratio and the quick ratio.

The cash ratio is a liquidity ratio that measures a company's ability to pay off all of its current liabilities with only its cash and cash equivalents. Since the cash ratio only allows for current liabilities to be paid with cash and cash equivalents, it's the most restrictive of the three liquidity ratios. The equation for the quick ratio is as follows:

Cash ratio = (cash + cash equivalents) / total current assets

The quick ratio is one of two alternatives a company can use in place of its cash ratio and measures a company's ability to pay off all of its current liabilities with cash and cash equivalents, as well as other highly liquid current assets. The quick ratio factors in a company's accounts receivables and other liquid current assets when assessing its ability to pay off its current liabilities, but does not include illiquid current assets, such as inventory. The two equations for the quick ratio are as follows:

Quick ratio = (cash + cash equivalents + accounts receivable) / total current assets

Quick ratio = (total current assets - inventory) / total current assets

The other alternative to the cash ratio is the current ratio. The current ratio measures a company's ability to pay off all of its current liabilities with its total current assets. It doesn't take into account the liquidity of its individual current assets, and assumes all current assets can be used to pay off its current liabilities. The equation for the current ratio is as follows:

Current ratio = (current assets) / (current liabilities)

RELATED FAQS
1. ### How can a company quickly increase its liquidity ratio?

Discover what high and low values in the liquidity ratio mean and what steps companies can take to improve liquidity ratios ... Read Answer >>
2. ### To what extent should you take a company's liquidity ratio into account before investing ...

Find out how important it is for an investor to know a company's liquidity ratio before deciding to invest, and why relying ... Read Answer >>
3. ### What is the formula for calculating the quick ratio in Excel?

Understand the basics of the quick ratio, including how it is used as a measure of a company's liquidity and how to calculate ... Read Answer >>
4. ### What financial ratios are most useful for an investor to evaluate the liquidity of ...

Learn which financial ratios are most useful for investors in financial analysis to evaluate the liquidity of an insurance ... Read Answer >>
5. ### Is there a downside to having a high liquidity ratio?

Find out why it might be disadvantageous for a company to have liquidity ratios that are too high, and learn how to find ... Read Answer >>
Related Articles
1. Investing

### Do Your Investments Have Short-Term Health?

If a company is strong enough to survive tough times, it is more likely to provide long-term value.
2. Investing

### Financial Ratios to Spot Companies Headed for Bankruptcy

Obtain information about specific financial ratios investors should monitor to get early warnings about companies potentially headed for bankruptcy.
3. Investing

### Ratio Analysis

Ratio analysis is the use of quantitative analysis of financial information in a company&rsquo;s financial statements. The analysis is done by comparing line items in a company&rsquo;s financial ...
4. Investing

### Key Financial Ratios to Analyze Tech Companies

Understand the technology industry and the companies that operate in it. Learn about the key financial ratios used to analyze tech companies.
5. Investing

### Using The Current Ratio

Find out more on how this liquidity ratio is used to measure a company's ability to pay short-term obligations.
6. Investing

### Efficiency Ratio

There are many types of efficiency ratios, but all measure how well a company utilizes its resources to make a profit. Business managers use these ratios to determine how well they are operating ...
7. Investing

You can learn a lot about an investmentâ€™s possibilities by reading the corporationâ€™s financial statements. But it also helps to be familiar with some basic investing ratios.
RELATED TERMS
1. ### Current Ratio

The current ratio is a liquidity ratio that measures a company's ...
2. ### Liquidity Ratios

A class of financial metrics that is used to determine a company's ...
3. ### Ratio Analysis

A ratio analysis is a quantitative analysis of information contained ...
4. ### Quick Assets

Anything having commercial or exchange value that can easily ...
5. ### Key Ratio

A mathematical ratio that illustrates and summarizes the current ...
6. ### Efficiency Ratio

Ratios that are typically used to analyze how well a company ...
Hot Definitions
1. ### Debt/Equity Ratio

The D/E ratio indicates how much debt a company is using to finance its assets relative to the value of shareholdersâ€™ equity.

A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange.
3. ### Net Present Value - NPV

Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
4. ### Return On Equity - ROE

The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability ...
5. ### Bond

A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
6. ### Whole Life Insurance Policy

A life insurance contract with level premiums that has both an insurance and an investment component. The insurance component ...