Cash Ratio

Cash ratio, abbreviated as CR, is used to evaluate a company's liquidity and ability to cover its short term liabilities with its cash and cash equivalents.  It measures the proportion of a company's cash and cash equivalents to its current liabilities.  Cash and cash equivalents typically include cash on hand, demand deposits, and short term, highly liquid investments that can be easily converted into known amounts of cash.  Current liabilities are the obligations a company is expected to pay within one year.  These can include accounts payable, short term debt, accrued expenses, and other liabilities due within the next 12 months.

A higher cash ratio indicates that a company has a greater ability to cover its short term liabilities with its readily available cash and cash equivalents, which is generally seen as a positive sign of financial health and liquidity.  However, an excessively high cash ratio might suggest that the company is not efficiently using its cash to generate returns or invest in growth opportunities.  Therefore, like any financial metric, the cash ratio should be analyzed in conjunction with other measures and within the context of the company's overall financial situation.

 

Cash Ratio Formula

\( CR =  C \;/\; CL \)

Symbol

\( CR \) = cash ratio

\( C \) = cash & cash equivalents

\( CL \) = current liabilities