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 only considers the most liquid assets.

2. How Does the Calculator Work?

The calculator uses the Cash Ratio formula:

Where:

• Cash and Cash Equivalents — Includes actual cash, bank balances, and short-term investments that can be quickly converted to cash
• Current Liabilities — All debts and obligations due within one year

Explanation: The ratio shows how many times the company can pay its current liabilities using only its cash and cash equivalents.

3. Importance of Cash Ratio

Details: A higher cash ratio indicates greater liquidity and financial health. Creditors often look at this ratio to assess a company's ability to pay short-term obligations.

4. Using the Calculator

Tips: Enter cash and cash equivalents and current liabilities in the same currency. Both values must be positive numbers, with current liabilities greater than zero.

5. Frequently Asked Questions (FAQ)

Q1: What is a good cash ratio?
A: Generally, a ratio of 0.5-1 is considered healthy. Below 0.5 may indicate liquidity problems, while above 1 may suggest inefficient use of cash.

Q2: How does cash ratio differ from current ratio?
A: Current ratio includes all current assets, while cash ratio only considers the most liquid assets (cash and equivalents).

Q3: Can cash ratio be too high?
A: Yes, an excessively high ratio may indicate the company isn't effectively using its cash for growth or investments.

Q4: Which industries typically have higher cash ratios?
A: Tech companies and financial institutions often maintain higher cash ratios than manufacturing or retail businesses.

Q5: How often should cash ratio be calculated?
A: It should be monitored quarterly along with other financial ratios to track liquidity trends.