Definition of Cash Ratio

Cash ratio is a liquidity ratio that takes the cash and cash equivalents as the only means of paying the current liabilities of a business. This ratio is very famous among the banks and financial institutions that they consider before issuing a credit facility to its clients. The credit ratio is more conservative and safer than other liquidity ratios that incorporate total assets rather than the real liquid elements of current assets like cash, marketable securities, and on-demand deposits.

The formula for cash ratio is as follows.

Assume a company has total cash and cash equivalents are $45000 and total current liabilities of $125000, the cash ratio will be 0.36 ($45000/$125000). It is assumed that the cash ratio should be at least between 0.75 and 1.25 to be considered safe, however, the criteria can be different for different institutions.