# Cash Ratio

Liquidity ratios Print Email

Cash ratio (also called cash asset ratio) is the ratio of a company's cash and cash equivalent assets to its current liabilities. The cash ratio is also known as the liquid asset ratio. 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:

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

Cash equivalents are short-term, highly liquid investments that can be easily converted into cash. They include investments such as Treasury bills, commercial paper, and money market funds. These investments are considered to be as good as cash because they can be quickly and easily converted into cash without significant loss of value. They are often included in a company's cash and cash equivalents on its balance sheet, as they can be used to meet the company's short-term obligations.

Current liabilities are a company's short-term obligations that are due within one year or within the company's operating cycle, whichever is longer. These include things such as accounts payable, short-term loans, taxes owed, and any other bills that are due within the next 12 months. Current liabilities are important because they represent the amount of cash a company needs to pay off its short-term debts and obligations.

Examples of current liabilities:

• Accounts payable (money owed to suppliers)
• Short-term loans
• Taxes owed
• Unearned revenue ( money received before providing the service)
• Wages and benefits owed to employees
• Interest payable
• Dividends payable

## Norms and Limits

The cash ratio is not as popular in financial analysis as the current ratio or the quick ratio; its usefulness is limited. There is no common standard for the cash ratio. In some countries, a cash ratio of at least 0.2 is considered acceptable. However, a ratio that is too high may indicate poor asset utilization for a company that has large amounts of cash on its balance sheet.

there are some companies that have extremely high cash ratios. For example, companies that operate in a highly regulated industry, such as utilities or healthcare, tend to have high cash ratios because they are required to maintain a certain level of liquidity to meet regulatory requirements. Other companies that have traditionally had high cash ratios include technology companies, consumer goods companies and some financial firms.

For example, Apple Inc had a cash ratio of 1.17 in 2020 which indicates it's high liquidity position. Another example would be Microsoft Corporation had a cash ratio of 0.79 in 2020.

It's important to note that high cash ratio can also indicate that the company is not investing or utilizing the cash effectively which could be detrimental in long run. A high cash ratio may indicate that the company is not using its cash to invest in growth opportunities, such as new product development, expansion into new markets, or acquisitions.

## Exact Formula in the ReadyRatios Analytic Software

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

there F1 – Statement of financial position (IFRS).

## Industry benchmark

Average values for the ratio you can find in our industry benchmarking reference bookCash ratio.

As the company's cash ratio is affected by the return on investment, cash flow and debt level as well as liquid assets, some ratios are more important than others because they help to explain certain aspects of a company's financial structure.

## How to Improve Cash Ratio

There are several ways a company can improve its cash ratio:

1. Increase cash flow: One of the most effective ways to improve a company's cash ratio is to increase its cash flow. This can be done by increasing revenue or decreasing expenses.

2. Reduce current liabilities: Another way to improve the cash ratio is to reduce current liabilities. This can be done by negotiating more favorable payment terms with suppliers, or by paying down debt.

3. Increase cash and cash equivalents: A company can also improve its cash ratio by increasing its cash and cash equivalents. This can be done by investing in cash equivalents such as Treasury bills, commercial paper, or money market funds.

4. Sale of non-core assets: A company can also improve its cash ratio by selling off non-core assets such as property, equipment, or investments that are not essential to the business.

5. Increase profitability: A company can also improve its cash ratio by increasing profitability, which can lead to more cash and cash equivalents on the balance sheet.

It's important to note that improving cash ratio could also be detrimental to the company's growth as it may required company to sacrifice growth opportunities. It's important to strive for a balance between liquidity and growth.

### See also

Quote Guest, 28 December, 2011
How to calculate cash ratio from a balance sheet that has no cash ?
Quote , 28 December, 2011
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Guest wrote:
How to calculate cash ratio from a balance sheet that has no cash ?

If there are is cash or cash equivalents, cash ratio = 0.
Quote Guest, 3 May, 2012
how to compute owners equity as a ratio of business
Quote , 4 May, 2012
Quote
how to compute owners equity as a ratio of business
Equity is not a ratio, but monetary item. It can be taken from Balance sheet (Statement of financial position).
Quote Guest, 15 April, 2014
how to calculate the cash and portfolio investment to deposits
Quote Guest, 6 January, 2015
what are cash equivalents?
Quote , 6 January, 2015
Quote Hisham, 31 March, 2020
Thanks for sharing this meaningful article but how Can I get to know the name of the author? as I am doing a research and I need his name for referencing purposes.

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