Cash Ratio Calculator Formula
Understand the math behind the cash ratio calculator. Each variable explained with a worked example.
Formulas Used
Cash Ratio
cash_ratio = current_liabilities > 0 ? cash_and_equivalents / current_liabilities : 0Liability Coverage by Cash
coverage_pct = current_liabilities > 0 ? (cash_and_equivalents / current_liabilities) * 100 : 0Variables
| Variable | Description | Default |
|---|---|---|
cash_and_equivalents | Cash and Cash Equivalents(USD) | 200000 |
current_liabilities | Total Current Liabilities(USD) | 300000 |
How It Works
How to Calculate the Cash Ratio
Formula
Cash Ratio = Cash and Cash Equivalents / Current Liabilities
The cash ratio is the most stringent liquidity metric. Unlike the current ratio or quick ratio, it only considers cash on hand and short-term investments that can be liquidated immediately. Most companies operate with a cash ratio below 1.0 because holding excessive cash is capital-inefficient. However, a very low cash ratio leaves little buffer for surprises.
Worked Example
A company holds $200,000 in cash and equivalents and has $300,000 in current liabilities.
cash_and_equivalents = 200000current_liabilities = 300000
- 01Cash Ratio = $200,000 / $300,000 = 0.67
- 02Liability Coverage = 0.67 x 100 = 67%
- 03The company can cover 67% of short-term liabilities with cash alone.
Ready to run the numbers?
Open Cash Ratio Calculator