# Cash Ratio

**Cash ratio **(also called **cash asset ratio**)** **is the ratio of a company's cash and cash equivalent assets to its total liabilities. Cash ratio is a refinement of quick ratio and indicates the extent to which readily available funds can pay off current liabilities. Potential creditors use this ratio as a measure of a company's liquidity and how easily it can service debt and cover short-term liabilities.

Cash ratio is the most stringent and conservative of the three liquidity ratios (current, quick and cash ratio). It only looks at the company's most liquid short-term assets – cash and cash equivalents – which can be most easily used to pay off current obligations.

## **Calculation (formula)**

Cash ratio is calculated by dividing absolute liquid assets by current liabilities:

Cash ratio = Cash and cash equivalents / Current Liabilities

Both variables are shown on the balance sheet (statement of financial position).

## **Norms and Limits**

Cash ratio is not as popular in financial analysis as current or quick ratios, its usefulness is limited. There is no common norm for cash ratio. In some countries a cash ratio of not less than 0.2 is considered as acceptable. But ratio that are too high may show poor asset utilization for a company holding large amounts of cash on its balance sheet.

## **Exact Formula in the ReadyRatios Analytic Software**

Cash ratio = F1[CashAndCashEquivalents] / F1[CurrentLiabilities]

F1 – Statement of financial position (IFRS).

## **Industry benchmark**

Average values for the ratio you can find in our industry benchmarking reference book – Cash ratio.

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How to calculate cash ratio from a balance sheet that has no cash ?

If there are is cash or cash equivalents, cash ratio = 0.

what are cash equivalents?