Cash Ratio Calculator

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

Examples of Cash Ratio Calculation

To illustrate how the cash ratio can vary across different industries and highlight factors that influence these differences, let's examine three hypothetical companies: a manufacturing firm (ManufactureX), a service company (ServiceY), and a retail business (RetailZ).

1. Manufacturing Company: ManufactureX

• Cash and Cash Equivalents: $150,000
• Current Liabilities: $300,000

Cash Ratio Calculation for ManufactureX: CR= $300,000 / $150,000 ​= 0.5

ManufactureX's cash ratio of 0.5 indicates that it has $0.50 in cash for every $1.00 of short-term liabilities. This lower ratio may reflect the capital-intensive nature of manufacturing, where resources are often tied up in inventory and equipment.

2. Service Company: ServiceY

• Cash and Cash Equivalents: $200,000
• Current Liabilities: $150,000

Cash Ratio Calculation for ServiceY: CR= $150,000 / $200,000​ = 1.33

With a cash ratio of 1.33, ServiceY can cover its short-term liabilities more than once with its cash on hand. This higher ratio is typical for service companies, which may have lower capital requirements and can maintain higher liquidity.

3. Retail Business: RetailZ

• Cash and Cash Equivalents: $250,000
• Current Liabilities: $500,000

Cash Ratio Calculation for RetailZ: CR = $500,000 / $250,000 ​= 0.5

RetailZ's cash ratio of 0.5 suggests it has half the amount of cash needed to cover its short-term liabilities. Retail businesses often have higher inventory levels and expenses, affecting their cash ratio. However, their ability to quickly convert inventory into cash can mitigate the lower cash ratio.

Factors Influencing Cash Ratios Across Industries

• Capital Intensity: Industries requiring significant investment in fixed assets (like manufacturing) might have lower cash ratios due to more resources being tied up in non-liquid assets.
• Business Cycle: Companies in industries with faster business cycles (like retail) can recover their liquidity quicker, even if their cash ratio appears lower.
• Operational Requirements: Service companies often have fewer capital requirements and can maintain higher liquidity, reflected in a higher cash ratio.

These examples demonstrate that the cash ratio can significantly vary across industries due to differences in capital requirements, operational nature, and business cycles. Understanding these nuances can help stakeholders make more informed decisions about financial health and risk management.

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.

1. 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.

2. Current Ratio Calculator: Measures a company's ability to pay off its short-term liabilities with all of its short-term assets. This offers a broader view of liquidity than the cash ratio.

3. Quick Ratio (Acid-Test Ratio) Calculator: Assesses a company's ability to meet its short-term obligations with its most liquid assets, excluding inventory. It's a stricter test of liquidity than the current ratio.

4. Working Capital Calculator: Calculates the difference between a company's current assets and current liabilities, providing insight into its short-term financial health and operational efficiency.

5. Debt to Equity Ratio Calculator: Evaluates a company's financial leverage by comparing its total liabilities to its shareholders' equity. This helps understand how much a company is financing its operations through debt versus its own funds.

6. Net Working Capital Needs Calculator: Helps businesses estimate the amount of working capital required to support their operations, based on the cycle of cash flow from purchasing inventory to collecting receivables.

7. Debt Service Coverage Ratio Calculator: Measures a company's ability to use its operating income to repay all its debt obligations, including repayment of principal and interest on both short-term and long-term debt.

8. Interest Coverage Ratio Calculator: Assesses a company's ability to make interest payments on its debt, which is crucial for evaluating financial stability and risk from a lender’s perspective.

9. Operating Cash Flow (OCF) Calculator: Focuses on the cash inflows and outflows directly related to a company's primary business activities, providing a clear view of its operational efficiency and liquidity.

10. Inventory Turnover Ratio Calculator: Measures how efficiently a company turns its inventory into sales, which can impact liquidity and cash flow.

Utilizing these calculators together can give users a comprehensive view of a company's liquidity, operational efficiency, and overall financial health, enabling more informed decision-making.

Authors

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