How to Calculate Cash Ratio

Cash Ratio is the ratio of a company's total cash and cash equivalents to its total short-term liabilities. It is an indicator of a company's ability to pay off its current liabilities. Note that this ratio ignores timing of both cash received and cash paid out.

Formula:
Cash Ratio = (Cash + Cash Equivalents) / Current Liabilities

Learn how to calculate the ratio with the following example:

IPO Ltd has the following data:
Cash in hand $50,000
Bank $65,000
Marketable securities $15,000
Treasury bills $25,000
Money market funds $35,000
Accrued expenses $80,000
Accounts Payable $90,000
Notes Payable $30,000

Then:
Cash and cash equivalents = Cash in hand + Bank + Marketable securities + Treasury bills + Money market funds = 50,000 + 65,000 + 15,000 + 25,000 + 35,000 = $190,000
Total short-term liabilities = Accrued expenses + Accounts Payable + Notes Payable = 80,000 + 90,000 + 30,000 = $200,000
Cash Ratio = 190,000 / 200,000 = 0.95

* Next: How to Calculate Price to Book Ratio
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Kelvin Wong Loke Yuen is an experienced writer with a strong background in finance, specializing in the creation of informative and engaging content on topics such as investment strategies, financial ratio analysis, and more. With years of experience in both financial writing and education, Kelvin is adept at translating complex financial concepts into clear, accessible language for a wide range of audiences. Follow him on: LinkedIn.

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