Cash Ratio Calculator


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Monitor the cash ratio of any company with CalcoPolis.

This handy online tool lets you quickly calculate the cash ratio of any company. This simple liquidity metric evaluates a company's ability to repay its short-term liabilities. 

This document will provide you with the most crucial cash ratio information, what it is, how it can be calculated, how to interpret the results, and finally, what a good cash ratio is.

What is the cash ratio?

The cash ratio is a liquidity metric that evaluates the company's ability to repay its short-term liabilities. 

Unlike similar financial indicators (like the current ratio and defensive interval), the cash ratio only considers the most liquid assets - cash and cash equivalents. For that reason, it is preferred by banks or other money lenders when assessing credit risk since not all assets can be liquidated fast enough to repay all short-term debt. The cash ratio definition is strict about it.

How to calculate the cash ratio?

Finding the cash ratio is surprisingly easy, especially for public companies, where all the data is available on the balance sheet.

To calculate the cash ratio, follow the procedure below.

  1. Find out the cash and cash equivalents on the company's balance sheet. 
  2. Determine the total amount of current liabilities. You can also find it on the balance sheet.
  3. Substitute the obtained values to the cash ratio formula below or use our calculator.

Cash Ratio formula

The cash ratio equation is straightforward - you only need to divide cash and cash equivalents by current liabilities.

CR = CCE / CL

Where:

  • CCE - cash and cash equivalents
  • CL - current liabilities

How to calculate cash and cash equivalents?

If the value of cash and cash equivalents is not directly present on the balance sheet, you may calculate it on your own. 

CCE = CB + DD + SA + MMF + TB

Where

  • CB - cash balance
  • DD - demand deposit
  • SA - saving account
  • MMF - money market fund
  • TB - treasury bills

What is a good cash ratio?

The cash ratio value greater than one means the company could easily repay all its short-term debt. 

The values lower than one means the company cannot repay its debt using the most liquid assets. However, it does not necessarily mean the company is insolvent. The company may still have other assets that cover its debt, for example, account receivables.

The company management should always balance the money to debt-ratio. On the one hand, high cash reserves give stability and secure the company from market downturns on unexpected events.

On the other hand, if invested wisely, high debt could give higher growth and generate more value for the shareholders.

The Present Value of Growth Opportunities is one of the gauges that may help with the decision. Visit our PVGO calculator for more details.

Helpful financial metrics

The cash ratio is not the only indicator of a company's financial health. To have a better overview of the financial status of a company, it is good to analyze the company from different angles.

The WACC calculator allows you to evaluate the company's rising money cost. If the cost is too high, it would be wise not to raise new debt.


Authors

Created by Lucas Krysiak on 2022-09-20 18:40:31 | Last review by Mike Kozminsky on 2022-09-27 12:48:10

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