This cash ratio calculator helps you assess a company’s financial strength and liquidity by measuring the proportion of its cash & cash equivalents against its current liabilities. The formula used to determine this indicator is given below the form.

Cash value:*
Cash equivalents:
Current liabilities:*

How does this cash ratio calculator work?

In accountancy and audit, cash ratio is defined as the proportion of cash and cash equivalents an entity owns against its short term liabilities, indicating its extreme liquidity position. More specifically this ratio indicates at which extent a business is able to pay in full and in due time short term obligations and debts by using its most liquid financial resources.

The algorithm behind this cash ratio calculator applies the equation explained here:

Cash Ratio (CR) = (Cash + Cash Equivalents) / Current liabilities

Since cash may refer to the one in hand or at bank, cash equivalents are considered assets sufficient liquid to be converted into cash quickly.

Current liabilities refer to obligations and debts which are due within a term less than or equal to 12 months or to a single business cycle.

From the three liquidity ratios used in accounting (quick, current and cash ratios) this is the one that by far measures the best the short term liquidity level a corporation has because it does not consider the figure of the inventory and accounts receivables.

The interpretation of the cash ratio level

Generally speaking, the higher the cash ratio is the better since it indicates the fact that the company being assessed has sufficient extremely liquid resources that can be used to pay off its short-term obligations. However an over liquid position is not interpreted as a positive signal on how efficient the company is using its own capital as it may show that its cash is not used for a business development plan or for investments in financial instruments that can generate revenue and profits.

More specifically, a cash ratio of 1.00 or above this level demonstrates that the company will be able to repay in full its immediate obligations by making use of its most liquid assets. However, in practice companies consider acceptable a level below 1 as they rather tend to use the cash to generate new profits.

Example of a cash ratio calculation

Let’s consider a company that has total cash of $100,000 and total short term obligations of $150,000 at December 31st 2015, then its cash ratio would be:

CR = $100,000/$150,000 = 0.67 or 66.67%.

07 May, 2015