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.
- 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.
Frequently Asked Questions
Is a cash ratio above 1.0 always good?
Not necessarily. While a ratio above 1.0 means you can cover all short-term debts with cash, it may also signal that cash is sitting idle rather than being invested in growth opportunities.
What is included in cash equivalents?
Cash equivalents are short-term, highly liquid investments that can be readily converted to cash with minimal risk of value change. Examples include Treasury bills, money market funds, and commercial paper with maturities under 90 days.
Learn More
Guide
Cash Flow Analysis Guide
Learn how to analyze cash flow for your business. Understand operating, investing, and financing cash flows, and why profitable companies can still run out of cash.
Ready to run the numbers?
Open Cash Ratio Calculator