Cash ratio

Cash ratio,

Definition of Cash ratio:

  1. The cash ratio is almost like an indicator of a firm’s value under the worst-case scenario—say, where the company is about to go out of business. It tells creditors and analysts the value of current assets that could quickly be turned into cash, and what percentage of the company’s current liabilities these cash and near-cash assets could cover.

  2. Comparison of cash plus cash equivalents to current liabilities. Also called liquidity ratio, it is a refinement of quick ratio and indicates the extent to which the readily available funds can pay off the current liabilities. Formula: (Cash + cash equivalents) ÷ Current liabilities.

  3. The cash ratio is a measurement of a company's liquidity, specifically the ratio of a company's total cash and cash equivalents to its current liabilities. The metric calculates a company's ability to repay its short-term debt with cash or near-cash resources, such as easily marketable securities. This information is useful to creditors when they decide how much money, if any, they would be willing to loan a company.

  4. The ratio of the liquid assets of a company to its current liabilities.

How to use Cash ratio in a sentence?

  1. The cash ratio is a liquidity measure that shows a company's ability to cover its short-term obligations using only cash and cash equivalents.
  2. The cash ratio is more conservative than other liquidity ratios because it only considers a company's most liquid resources.
  3. The precautionary motive for cash holdings appears to explain the increase in the average cash ratio.
  4. The cash ratio is derived by adding a company's total reserves of cash and near-cash securities and dividing that sum by its total current liabilities.

Meaning of Cash ratio & Cash ratio Definition