How this calculator works
The cash ratio is the strictest of the common liquidity ratios. It counts only cash, demand deposits, savings, money market funds and short-dated government bills against the liabilities due within a year. Inventory and receivables are left out because they must be sold or collected before they can pay a bill. A ratio below 1 means the company cannot settle all current liabilities from cash alone, which is normal for most firms because they expect to keep operating. Credit analysts use the ratio to see how long a company could keep paying during a cash squeeze.
Formula
Cash and cash equivalents = cash + demand deposits + savings + money market funds + treasury bills. Cash ratio = cash and cash equivalents / current liabilities.
Worked example
Cash of $50,000, demand deposits of $60,000, savings of $40,000, money market funds of $30,000 and treasury bills of $20,000 total $200,000. Against current liabilities of $250,000 the cash ratio is 0.8.
Advertisement
Frequently asked questions
How does the cash ratio differ from the quick ratio?
The quick ratio also counts receivables, which are expected to convert to cash within the operating cycle. The cash ratio counts only assets that are already cash or near cash, so it is always lower than or equal to the quick ratio.
Should restricted cash be included?
Generally not. Cash held as collateral, in escrow or restricted by a lender is not available to pay ordinary current liabilities. Some analysts include it when the restriction lifts within the year.
Is a very high cash ratio bad?
It can be. Cash earns little, so a very high ratio may mean management is not reinvesting. In a downturn, however, a high cash ratio is a genuine advantage.