Enter the total cash and cash equivalents along with the current liabilities into the calculator. The calculator will evaluate and display the cash ratio of the business.
Cash Ratio Formula
The following formula can be used to calculate the cash ratio of a business.
CR = C / CL
- Where CR is the cash ratio
- C is the cash and cash equivalents
- CL is the current liabilities.
Cash Ratio Definition
A cash ratio is a financial measure of how “liquid” or solvent a business is. In other words, how much cash a business has relative to its liabilities. A larger cash ratio means a company has a greater amount of cash to work with respect to its liabilities. This typically means the business is more profitable.
Can cash ratio be negative?
A cash ratio cannot be negative. If you look at the formula above, you can see that a cash ratio is a ratio of cash to liabilities. When a company is said to have a negative amount of cash, it’s actually considered a liability. So, if the company has no cash, but a lot of liabilities, then the ratio would be 0, but would never drop below 0 to be negative.
Is cash ratio a percentage?
A cash ratio by definition is simply a ratio of cash to liabilities. This ratio can be converted to a percentage by multiplying the ratio by 100, but the initial ratio when calculated is not a percentage.
What can cash ratios tell you about a company?
A cash ratio’s main purpose is to describe how well-positioned a company is to cover its debts and liabilities. It’s a more conservative or simple way to look at liquidity than a typical liquidity ratio.
A cash ratio is more conservative than current ratios or quick ratios because it excludes the value of the other assets of the company. The numerator only includes cash and cash equivalents.
A cash ratio of less than 1 means the company has more liabilities than current cash. This is actually typical, especially in early-stage companies. A cash ratio of greater than 1 means the company has more cash than liabilities and could pay off all of those liabilities immediately. This is more common for companies that have been in business for a long time.
What is a good cash ratio?
A good cash ratio entirely depends on the company being analyzed. For example, you would expect an early startup to have a cash ratio of less than one since it should be seeking loans to grow its business. In more general terms though, the higher the cash ratio the better positioned the company is to deal with downturns in business.
Cash Ratio Example
How to calculate a cash ratio?
- First, determine the total cash.
Calculate the total cash and cash equivalents of a business.
- Next, determine the current liabilities.
Calculate the current liabilities owned by the company.
- Finally, calculate the cash ratio.
Using the formula above, calculate the cash ratio.
A cash ratio is the ratio of cash and cash equivalents to the total cost of liabilities that a company owns. This ratio is used to measure liquidity in a company.