Cash Ratio Definition and Explanation

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Quick Definition

Measures how completely a company can pay its liabilities.

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Cash Ratio Formula

Explanation of Cash Ratio

Also called the Cash Asset Ratio, the Cash Ratio is the most rigid liquidity ratio used to measure a company’s ability to cover liabilities in the short term. The Quick Ratio and Current Ratio are similar, but both are somewhat less strict.

Since Cash and Cash Equivalents and Marketable Securities are the most liquid and can be utilized by the company almost immediately, these two can be used to pay liabilities at a moments notice.

Importance of Cash Ratio

The Cash Ratio should be at least 1.0 for any company, showing they can completely pay their liabilities if they had to. An increasing Cash Ratio is a positive sign, showing that the company is better able to cover its obligations to creditors.