The cash ratio is another measurement of a company’s liquidity and their ability to meet their short-term obligations. The formula for the cash ratio, like the current and the quick ratio, uses current liabilities as the denominator in the formula:

• (cash + marketable securities) divided by current liabilities

The elimination of accounts receivables used in both the current and quick ratios, and the elimination of inventories that are part of the numerator of the current ratio, leaves us with a ratio that shows the level of the firm’s cash and near-cash investments relative to their current liabilities.

Worst-case scenario

The cash ratio is almost like an indicator of a firm’s value under the worst-case scenario where the company is about to go out of business. This ratio tells creditors and analysts the value of current assets that could quickly be turned into cash, and what percentage of the company’s current liabilities these cash and near-cash assets could cover.

The cash ratio is seldom used in financial reporting or by analysts in the fundamental analysis of a company. It is not realistic for a company to maintain excessive levels of cash and near-cash assets to cover current liabilities. It is often seen as poor asset utilization for a company to hold large amounts of cash on its balance sheet, as this money could be returned to shareholders or used elsewhere to generate higher returns. While providing an interesting liquidity perspective, the usefulness of this ratio is limited.

Liquidity Measurement Ratios: Cash Conversion Cycle
Related Articles
1. Investing

### Liquidity Measurement Ratios

Learn about the current ratio, quick ratio, cash ratio and cash conversion cycle.
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

### Useful Balance Sheet Metrics

These metrics can help you better understand the information found on balance sheets.
5. Investing

### Understanding financial liquidity

Financial liquidity comes into play for companies, your personal finances, investing, and the financial markets. However, assets and investments have varying liquidity levels.
6. Investing

### Debt Ratios

Learn about the debt ratio, debt-equity ratio, capitalization ratio, interest coverage ratio and the cash flow to debt ratio.
7. 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.
8. Investing

### Key Financial Ratios for Retail Companies

Using the following liquidity, profitability and debt ratios, an investor can gather deeper knowledge of a retail company's short-term and long-term outlook.