1. What is the Cash Ratio?

The Cash Ratio is a liquidity ratio that measures a company's ability to pay off its current liabilities with only cash and cash equivalents. It's the most conservative liquidity ratio because it excludes inventory and accounts receivable.

2. How Does the Calculator Work?

The calculator uses the Cash Ratio formula:

Where:

• \( \text{Cash} \) — Physical currency and demand deposits
• \( \text{Equivalents} \) — Short-term, highly liquid investments
• \( \text{Current Liabilities} \) — Debts/obligations due within one year

Explanation: The ratio shows how many times the company can pay its current liabilities with its most liquid assets.

3. Importance of Cash Ratio

Details: A higher ratio indicates greater liquidity. Creditors often look at this ratio to assess short-term financial health. A ratio of 1 or more means the company can cover all current liabilities with just cash and equivalents.

4. Using the Calculator

Tips: Enter all values in the same currency. Cash and equivalents should be their current market values. Current liabilities should include all obligations due within one year.

5. Frequently Asked Questions (FAQ)

Q1: What is considered a good cash ratio?
A: Generally, 0.5-1 is considered adequate, but this varies by industry. Too high may indicate inefficient use of cash.

Q2: What's included in cash equivalents?
A: Treasury bills, commercial paper, money market funds, and other investments with maturities ≤ 3 months.

Q3: How does this differ from current ratio?
A: Current ratio includes all current assets (inventory, receivables), while cash ratio only includes the most liquid assets.

Q4: When is this ratio most useful?
A: Particularly important during economic downturns or for companies with uncertain receivables.

Q5: Can the ratio be too high?
A: Yes, excessive cash might indicate poor capital allocation and missed investment opportunities.