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.
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).