Cash Ratio Calculator

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and notes

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Cash Ratio

Cash Ratio =

(Cash + Cash equivalents)

Current Liabilities

INTERPRETATION

The cash ratio measures a company’s ability to pay off its current liabilities with only cash and cash equivalents.

It’s used to determine a company’s liquidity and to see if it maintains adequate cash balances to pay off its current debts as they come due.

Note: expanded calculation

Add cash and cash equivalents and divide by the total current liabilities of a company.

EXAMPLE

M&M’s balance sheet lists these items:

Cash: $10,000

Cash Equivalents: $2,000

Accounts Payable: $5,000

Current Taxes Payable: $1,000

Current Long-term Liabilities: $10,000

M&M’s cash ratio

= (10,000 + 2,000) / (5,000 + 1,000 + 10,000) = .75

M&M’s ratio is .75. This means that M&M only has enough cash and equivalents to pay off 75 percent of its current liabilities. This fairly high ratio means M&M maintains a relatively high cash balance during the year.

BENCHMARK: HA, PG, EB, ROT

A ratio of 1 means that the company has the same amount of cash and equivalents as its current debt. In other words, the company would have to use all of its cash and equivalents to pay off its current debt.

A ratio above 1 means that the company can pay all the current liabilities with cash and equivalents.

A ratio below 1 means the company needs more than its cash reserves to pay off its current debt.

Cash Ratio :

ABBREVIATION KEY:

ROT: Rule of thumb
HA: Historical Average (organization’s historical average)
PG: Peer Group average
EB: Economic Benchmark

DISCLAIMER: The interactive calculators on this site are self-help tools intended to help you visualize and explore your financial information. They are not intended to replace the advice of a qualified professional. Because each business is different, we can not guarantee accuracy.