What is Cash Ratio?
Since cash is the most liquid asset, a financial analyst may examine cash ratio and its equivalent to to current liabilities.
Trade investment or marketable securities are equivalent of cash , therefore they may be included in the computation of ratios.
And this ratio evaluate the company’s liquidity. It shows the company’s capability to pay short term liabilities with its liquid assets i.e. cash or cash equivalents.
However , the investors or lenders uses this ratio to evaluate the short term risk of the company.
What is the the formula for cash ratio?
Cash Ratio = Cash + Marketable securities ÷ Current liabilities (i.e. short term liabilities)
Example
XYZ Company
Balance sheet for the year ending 31 March
| Equity | Amount (₹) |
| Equity share capital | 225 |
| Non-current liabilities | |
| Long-term borrowings | 300 |
| Current liabilities | |
| Short term borrowings | 200 |
| Total Liabilities | 725 |
| Non-current assets | |
| Plant & Equipment | 525 |
| Less: Accu. dep | 200 |
| Net block | 325 |
| Current assets | |
| Inventories | 100 |
| Cash and cash equivalents | 300 |
| Total assets | 725 |
C. R. = 300 ÷ 200 = 1.5%
It means company have enough cash to pay off its short term dues.
Refer: https://taxandfinanceguide.com/debt-to-equity-ratio/ , https://taxandfinanceguide.com/what-is-pe-ratio/
