Answers the Question
Can we easily pay off our short-term obligations?
Calculator for Cash Ratio
What Is the Cash Ratio?
The cash ratio is a ratio between the liquid resources that a firm has compared to the short-term debt that they are obligated to pay.
Why Is it Important?
- Companies that are unable to pay for their short-term debts are at the mercy of their creditors. Such firms can be forced to borrow at high rates which can further destabilize their firms.
Formula(s) to Calculate Cash Ratio
- CASH RATIO = (CASH + CASH EQUIVALENTS) / CURRENT LIABILITIES
- Attempting to maintain a cash ratio that is too high prevents firms from investing their money into income-producing uses.
- Assuming that it is appropriate to compare cash ratios between firms in different markets. Firms in markets with different risk profiles can, and should, be expected to hold differing quantities of cash and cash equivalents for a given level debt.
- Some firms may attempt to improve their financial appearance by utilizing longer-term debt to reduce their short-term obligations or increase their cash on hand.