What Is Cash Ratio? Formula, Meaning and Example
Learn what Cash Ratio means, how to calculate it, and how investors can use it to assess a company's immediate liquidity.
What Is Cash Ratio?
The Cash Ratio measures a company's ability to meet current liabilities using cash, cash equivalents and qualifying short-term marketable securities.
It is one of the most conservative liquidity ratios.
Formula
Cash Ratio = (Cash + Cash Equivalents + Marketable Securities) ÷ Current Liabilities
Unlike the Current Ratio and Quick Ratio, it generally does not rely on inventory sales or collection of receivables.
Example
Suppose:
Cash Ratio = (₹80 + ₹20) ÷ ₹100 = 1.00
The company has ₹1 of cash-like assets for every ₹1 of current liabilities.
Cash Ratio vs Quick Ratio
| Ratio | Main Assets |
|---|---|
| Current Ratio | Broad current assets |
| Quick Ratio | Liquid assets, generally excluding inventory |
| Cash Ratio | Cash, cash equivalents and qualifying securities |
A company can therefore have a strong Current Ratio while having a much lower Cash Ratio.
Is a High Cash Ratio Good?
A high ratio generally means stronger immediate liquidity.
But extremely high cash balances are not automatically positive. Excess cash may remain idle instead of being invested, returned to shareholders or used to reduce debt.
Is a Low Cash Ratio Bad?
Not necessarily.
Businesses with predictable operating cash flows can operate with low cash balances because they continuously collect receivables and generate cash from operations.
Indian Equity Example
| Metric | Company A | Company B |
|---|---:|---:|
| Cash + Securities | ₹500 crore | ₹100 crore |
| Current Liabilities | ₹500 crore | ₹500 crore |
| Cash Ratio | 1.00 | 0.20 |
Company A has stronger immediate liquidity, but the investor should also examine cash flow, debt and business stability.
Industry Matters
There is no universal ideal Cash Ratio.
Compare companies with similar business models and examine the company's historical trend.
Advantages
Limitations
Frequently Asked Questions
Is a Cash Ratio of 1 good?
It means qualifying cash-like assets approximately equal current liabilities. Whether that is appropriate depends on the business.
Is Cash Ratio better than Quick Ratio?
It is more conservative, but each ratio answers a different question.
Can a low Cash Ratio be acceptable?
Yes. Strong operating cash generation can make a lower ratio perfectly normal.
Final Thoughts
Cash Ratio gives investors a focused view of immediate liquidity.
Use it with Current Ratio, Quick Ratio, debt and cash-flow analysis.
Related reading: What Is Quick Ratio?
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Disclaimer: This article is for educational purposes only and does not constitute financial advice. Please consult a SEBI-registered investment adviser before making investment decisions.
This article is for educational purposes only and does not constitute financial advice. Please consult a SEBI registered investment advisor before making any investment decisions.