Cash Ratio

The cash ratio measures a company’s ability to meet short-term liabilities using only its most liquid assets: cash and cash equivalents. It is a conservative liquidity metric used by lenders and investors to assess immediate solvency.

Formula

Cash Ratio = (Cash + Cash Equivalents) / Current Liabilities

Cash equivalents typically include marketable securities and other assets that can be quickly converted to cash.

What it indicates

• A ratio greater than 1: the company has more cash and equivalents than current liabilities and can cover short-term debts immediately.
• A ratio equal to 1: cash equals short-term liabilities.
• A ratio less than 1: the company does not have enough cash and equivalents on hand to cover all short-term liabilities.

Because it excludes receivables and inventory, the cash ratio is more conservative than the current or quick ratios. Typical acceptable values vary by industry; many firms fall between about 0.5 and 1.0.

Example

If a company holds $30.2 billion in cash and $23.5 billion in marketable securities (total $53.7 billion) and has $123 billion in current liabilities:
Cash Ratio = $53.7B / $123B ≈ 0.43

Interpretation: The company relies on credit terms, working capital management, or retained liquidity for operations rather than holding large cash buffers.

Limitations

• Narrow focus: ignores receivables and inventory, which can be significant sources of near-term liquidity.
• Industry differences: some sectors operate routinely with low cash reserves or high short-term financing.
• Timing and seasonality: single-period snapshots can misrepresent liquidity around large inflows or seasonal swings.
• Excess cash: an unusually high cash ratio can signal inefficient capital use (cash that could be invested or returned to shareholders).
• Best used comparatively: across peers, industry averages, or the same company over time.

What is a good cash ratio?

• Generally, ≥1 indicates the capacity to pay all short-term debts with cash and equivalents.
• Ratios under 0.5 may be viewed as risky, though industry norms matter.
• A very high ratio may reflect conservative management or poor capital allocation.

How to improve the cash ratio

Increase cash and equivalents:
– Speed up receivables collection.
– Reduce or liquidate noncore assets.
– Retain earnings rather than paying out cash.

Reduce current liabilities:
– Refinance short-term debt as long-term.
– Negotiate extended supplier payment terms.
– Cut discretionary expenses and pay down short-term obligations.

Operational improvements:
– Improve inventory turnover.
– Time large expenditures to preserve liquidity.

Bottom line

The cash ratio is a strict measure of immediate liquidity, useful for assessing how well a company could meet short-term obligations without selling other assets. It should be interpreted alongside other ratios, industry norms, and trends over time to provide a complete picture of financial health.