This Cash Ratio Template will show you how to calculate the cash ratio which measures a company’s ability to pay off short-term debt obligations with cash and cash equivalents.
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What is Cash Ratio?
The cash ratio, sometimes referred to as the cash asset ratio, is a liquidity ratio that measures a company’s ability to pay off short-term debt obligations with cash and cash equivalents. Compared to other liquidity ratios such as the current ratio and quick ratio, the cash ratio is a stricter, more conservative measure because only cash and cash equivalents – a company’s most liquid assets – are used in the calculation.
The cash ratio indicates to creditors, analysts, and investors the percentage of a company’s current liabilities that cash and cash equivalents will cover. A ratio above 1 means that the company will be able to pay off its current liabilities with cash and cash equivalents.
Creditors prefer a high cash ratio as it indicates that the company can easily pay off its debt. Although there is no ideal figure, a ratio of not lower than 0.5 to 1 is usually preferred. The cash ratio figure provides the most conservative insight into a company’s liquidity since only cash and cash equivalents are taken into consideration.
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