How the cash ratio works
The cash ratio is cash divided by current liabilities. On $200,000 of cash and $400,000 of bills it is 0.50. The current ratio on that same $400,000 denominator keeps receivables and inventory in.
Cash ratio
0.50
$200,000 of cash against $400,000 of current liabilities.
- Cash
- $200,000
- Current liabilities
- $400,000
- Cash ratio
- 0.50
Cash and near-cash. Not receivables, not inventory.
Bills falling due within a year. The same denominator the current ratio uses.
On this page
Next on Models and deals
Cash ratio against current ratioIn short
- Cash ratio is cash / current liabilities. $200,000 / $400,000 is 0.50.
- Raise cash to $400,000 against the same $400,000 of bills and the cash ratio is 1. Cash covers the next year of bills on its own.
- Cut cash to $80,000 and the ratio is 0.20. Four fifths of the bills would have to wait on collections or stock.
- The $400,000 of current liabilities is the same denominator the current ratio uses. This page takes receivables and inventory out.
- How the quick ratio works takes inventory out and keeps receivables. This page takes both out.
Coverage by cash alone
The cash ratio asks whether cash and near-cash cover the bills that fall due within a year, with receivables and inventory taken out:
On $200,000 of cash against $400,000 of current liabilities, the ratio is 0.50. Half the next year of bills is covered by cash on that reading. The other half waits on collections, stock, or a new facility.
The $400,000 is the same denominator the current ratio uses. The current ratio keeps every current asset in. The quick ratio takes inventory out and keeps receivables. This page takes both out. Cash ratio against quick ratio is that last step.
The cash ratio calculator on this page is that one division. What liquidity means is the wider idea. Working capital is the dollar gap behind the current ratio, not this cash line.
When cash covers the bills on its own
Keep current liabilities at $400,000. Raise cash to $400,000. The cash ratio is 1.
The next year of bills is covered by cash without waiting on a customer or a warehouse. That is a strong cash reading. It is also cash sitting idle. A 1 is not a profit, and it is not a claim that the firm should hold this much. The first sheet's 0.50 was the same $400,000 of bills on $200,000 of cash. Ranking those two sheets by the cash ratio ranks the cash line, not a change in the bills.
A thin cash line on the same bills
Cut cash to $80,000 against the same $400,000. The cash ratio is 0.20.
One fifth of the bills is covered by cash. The rest depends on receivables turning, stock selling, or a facility being there on Tuesday. For a grocer that sells today and pays suppliers later, a thin cash ratio is ordinary. In a firm whose customers pay in ninety days, the identical 0.20 is a tighter reading.
How the current ratio works is the multiple that keeps those slower assets in. Current against quick is the first strip-out. This page is the second.
What the 0.50 is not
It is not the current ratio. Current keeps receivables and inventory in. Cash takes them out. How the current ratio works is that wider multiple, on a different teaching sheet that also carries inventory and receivables.
It is not the quick ratio. Quick keeps receivables. Cash does not. How the quick ratio works is the middle step.
It is not liquidity in the market sense of selling without moving the price. It is a balance sheet coverage by the cash line on a closing date.
A closing date is a photograph
Cash on the closing date is a number the firm knows in advance. Parking a facility draw in cash overnight raises this ratio with no change in the trading behind it.
Compare the figure with the same firm a year ago, and with firms doing the same work. A fall from 0.50 to 0.20 in four quarters says something. The same 0.20 read cold says almost nothing until you know what the company sells.
What this page is not doing
It is not a cash forecast, not a current-ratio engine, and not a claim that 0.50 is healthy. The three sheets are 0.50 on $200,000 of cash against $400,000 of bills, 1 when cash is $400,000, and 0.20 when cash is $80,000. This page does not bring current assets other than cash into the numerator. This is educational material, not financial advice.
Worked examples
0.50 on \$200,000 of cash
Cash is $200,000. Current liabilities are $400,000. What is the cash ratio?
- Cash ratio is cash over current liabilities: .
- Half the $400,000 of bills is covered by the $200,000 of cash.
The cash ratio is 0.50. Cash is $200,000. Current liabilities are $400,000.
1 when cash equals the bills
Cash is $400,000. Current liabilities are still $400,000. What is the cash ratio?
- Cash ratio: .
- The $400,000 of cash covers the $400,000 of bills on its own.
The cash ratio is 1. Cash is $400,000. Current liabilities are $400,000.
0.20 on \$80,000 of cash
Cash is $80,000. Current liabilities are $400,000. What is the cash ratio?
- Cash ratio: .
- The $80,000 of cash covers one fifth of the $400,000 of bills.
The cash ratio is 0.20. Cash is $80,000. Current liabilities are $400,000.
Common questions
Is a cash ratio above 1 required?
No. The second sheet's 1 means cash covers the bills without help. Many sound firms run below 1 because customers pay before suppliers are paid. The first sheet's 0.50 is $200,000 against $400,000, not a failing grade.
Why take receivables out as well as inventory?
Because a receivable still has to be collected. The quick ratio keeps it in. The cash ratio does not. On this page the $400,000 of bills is covered only by cash.
Is this the current ratio's denominator?
Yes. $400,000 of current liabilities is the same bills line. The current ratio keeps every current asset in. This ratio keeps only cash.
Keep reading
This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.