What the cash ratio tells you
The cash ratio is the strictest of the common liquidity ratios. It counts only cash and cash equivalents: money on hand and in bank accounts, plus investments so close to maturity that the business reports them as cash, generally those bought with three months or less left to run. Receivables, inventory and every other current asset are left out, even if they will turn into cash within weeks. Current liabilities are the obligations due within a year.
A result of 0.40 means cash and cash equivalents equal 40% of current liabilities. The other 60% would have to be met from customer payments, sales, new borrowing or other sources as the year goes on. A result of 1.00 means the business could pay every current liability today from the cash it holds.
What this calculator counts
This calculator counts cash and cash equivalents only. Some analysts also add short-term investments, such as marketable securities, which gives a higher result. Check which version a published figure uses before you compare it with yours. If you want to include short-term investments and receivables, use the quick ratio.
Reading a high or low result
A business does not usually need cash equal to all its current liabilities, because those bills fall due across the year while customer payments and new sales bring cash in over the same period. The cash ratio shows how much cover there would be if those inflows slowed or stopped.
- A low ratio can mean the business relies on collecting receivables and making new sales to meet its obligations. That may be routine where cash comes in steadily, and more of a concern where income is irregular or new credit would be hard to arrange.
- A high ratio gives more of a buffer against a sudden shortfall, but it is not automatically better. Cash held beyond what the business needs could be earning a return, paying down debt or funding growth. A high figure can also be temporary, for example just after a loan is drawn or before a large planned payment.
What is normal depends on the industry and on how predictable the business’s cash flow is. Compare the ratio with earlier periods for the same business, or with similar businesses.
What the ratio does not show
- It ignores the cash that operations will generate during the year.
- It leaves out unused credit facilities, such as an overdraft limit or a revolving loan, that the business could draw on.
- It is a snapshot of one day. Cash balances can move sharply around payroll, tax payments and large customer receipts.
Common mistakes
- Adding short-term investments or receivables, then comparing the result with a cash-only figure.
- Counting restricted cash, such as deposits held as security for a loan or a guarantee. It is often reported separately because it cannot be used to pay everyday bills.
- Judging liquidity from a single balance sheet date. Cash on any one day can be unusually high or low, so look at several period ends.
- Treating a rising ratio as an improvement without asking why cash is building up.
Related measures
The current ratio is the broadest liquidity test, counting all current assets against current liabilities. Working capital shows the same comparison as an amount rather than a ratio. The cash conversion cycle estimates how long cash is tied up between paying suppliers and collecting from customers, which helps explain why cash balances rise and fall.