Cash Ratio
Understanding the Cash Ratio: A Conservative Measure of Liquidity
The Cash Ratio is a stringent financial metric that measures a company's ability to cover its short-term liabilities using only its cash and cash equivalents. This ratio excludes other current assets, providing a conservative view of a company's liquidity.
Cash Ratio = (Cash and Cash Equivalents) / Current Liabilities
Suppose Company DEF has the following financial details:
Cash and Cash Equivalents: $80,000
Current Liabilities: $160,000
To calculate the Cash Ratio:
Divide cash and cash equivalents by current liabilities: 80,000/160,000=0.5
A Cash Ratio of 0.5 indicates that Company DEF has $0.50 in cash and cash equivalents for every $1 of its current liabilities. This suggests the company may need to rely on other assets or financing to cover its short-term obligations.
Liquidity Ratio