Transparent method
The formula
Worked example
Example inputs
How to interpret the result
Cash ratio deliberately excludes receivables and inventory entirely, counting only cash and cash equivalents against current liabilities, which makes it the strictest possible liquidity test. A company can fail this specific test while still being genuinely solvent through receivables collection, so a low cash ratio alone doesn't necessarily signal real trouble.
Before you rely on it
What to check
Read a low cash ratio alongside current ratio and quick ratio rather than in isolation, since cash ratio alone doesn't account for receivables that may collect reliably and quickly.
The common error
Where people go wrong with cash ratio calculator
Treating a low cash ratio as proof of a liquidity crisis on its own. It's deliberately the strictest of the common liquidity ratios, excluding receivables entirely, and a low reading doesn't automatically mean the company can't meet its obligations through normal collections.
Sensitivity evidence
How available amount changes the calculated ratio
| Available amount | Calculated ratio | Dollar cushion |
|---|---|---|
| $120,000 | 1.20× | $20,000 |
| $135,000 | 1.35× | $35,000 |
| $150,000worked example | 1.50× | $50,000 |
| $165,000 | 1.65× | $65,000 |
| $180,000 | 1.80× | $80,000 |
Every input, tested
Which input moves the calculated ratio most
| Input | Tested from | To | Calculated ratio at each end | Swing |
|---|---|---|---|---|
| Required amount | $90,000 | $110,000 | 1.67× to 1.36× | 0.30× (20%) |
| Available amount | $135,000 | $165,000 | 1.35× to 1.65× | 0.30× (20%) |
Two variables at once
Calculated ratio by available amount and required amount
| Available amount \ Required amount | $80,000 | $100,000 | $120,000 |
|---|---|---|---|
| $120,000 | 1.50× | 1.20× | 1.00× |
| $135,000 | 1.69× | 1.35× | 1.13× |
| $150,000 | 1.88× | 1.50× | 1.25× |
| $165,000 | 2.06× | 1.65× | 1.38× |
| $180,000 | 2.25× | 1.80× | 1.50× |
Step by step
The worked example, input by input
| Input | Value used |
|---|---|
| Available amount | $150,000 |
| Required amount | $100,000 |
| Calculated ratio | 1.50× |
| Dollar cushion | $50,000 |
Where the inputs come from
Available amount is cash and cash equivalents only, such as bank balances and treasury bills, with no receivables or inventory. Required amount is current liabilities from the balance sheet. Use the same date for both. Because the test is so strict, businesses rarely hold enough cash to reach a ratio of 1, so treat the number as a measure of the very worst case rather than a target.
When the result stops applying
A low ratio is not a problem if the business collects receivables quickly or has a committed credit line. The ratio treats all current liabilities as due today, which overstates the pressure. Companies with strong cash flow often hold little cash, and seasonal businesses swing sharply through the year.
What to compare it with
The quick ratio and current ratio give less strict views of liquidity, and the working capital calculator shows the dollar cushion. The burn rate page shows how long cash lasts for a business that loses money. Compare with peers, since normal cash ratios differ a great deal between industries.
People also ask
Frequently asked questions
What is a good cash ratio?
There is no universal number. Above 0.5 is considered safe by some analysts, but many healthy companies run lower because they do not want idle cash.
Is a very high cash ratio good?
Not necessarily. It shows safety, but it may mean the company is not investing or returning cash to owners, which lowers returns.
How is the cash ratio different from the quick ratio?
The cash ratio counts only cash and equivalents, while the quick ratio adds accounts receivable and marketable securities.