What is Cash Ratio?
The most conservative liquidity ratio, measuring a company's ability to pay short-term debts with only cash and cash equivalents.
Think of it like this
Like checking if you have enough cash in your wallet to pay all bills due today - no credit cards, no selling stuff.
Formula
Cash Ratio = (Cash + Cash Equivalents) รท Current Liabilities- Cash: Money in bank accounts
- Cash Equivalents: Short-term investments easily converted to cash
- Current Liabilities: Debts due within one year
Why it matters
- Shows immediate ability to pay debts
- Most stringent liquidity test
- Important during financial stress
- Indicates financial cushion
What's a good value?
< 0.2
Low
May struggle with unexpected expenses
0.2-0.5
Adequate
Normal for most industries
0.5-1.0
Strong
Comfortable cash position
> 1.0
Very High
Could deploy cash more efficiently
Real-world example
Apple maintains a cash ratio above 0.5, providing a strong safety cushion.
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