Cash Ratio
Cash and marketable securities divided by current liabilities. The strictest standard liquidity measure: pure cash on hand against near-term obligations.
When to use: Use as a worst-case stress test — "if collections froze and inventory was unsalable, could we still meet obligations?" Useful for distressed-credit analysis. Most healthy firms run cash ratios of 0.2–0.5; very high cash ratios signal unproductive capital.
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| CashR | Cash Ratio | Cash & equivalents / current liabilities | integer |
| Cash | Cash & Equivalents | Cash plus marketable securities | $ |
| CurrentLiabilities | Current Liabilities | Accounts payable, short-term debt, and other liabilities due within one year | $ |
Real-Life Examples
Example 1: Tech Cash Pile
Cash + securities $80M, current liabilities $100M.
Given
Step-by-Step
Cash ratio of 0.80 — strong absolute liquidity. The firm could cover 80% of current liabilities from cash alone.
Frequently Asked Questions
Highly liquid investments that can be sold quickly with minimal price impact: Treasury bills, money-market instruments, short-term commercial paper, sometimes investment-grade short-term bonds. Excludes equity holdings and longer-duration debt that may have illiquid markets.
It can be. Cash ratios above 1 may indicate the firm is hoarding cash rather than reinvesting in growth or returning it to shareholders. Activist investors often target cash-rich balance sheets for buybacks or special dividends.