cash ratio

Definition

The cash ratio is the most conservative liquidity metric, measuring a company’s ability to pay short‑term obligations using only its most liquid assets. It is calculated by dividing cash and cash equivalents by current liabilities. A ratio above 1.0 indicates that cash on hand fully covers immediate liabilities, offering the highest reassurance to creditors and suppliers. However, maintaining a very high cash ratio may imply underutilized resources that could be invested for higher returns. Conversely, a very low ratio could signal liquidity risks, especially in a downturn. Management balances the cash ratio with other liquidity measures to ensure sufficient reserves for emergencies while avoiding excessive idle cash that erodes potential growth opportunities.

See also