Cash ratio
In one sentenceCash and cash equivalents divided by current liabilities; the most conservative liquidity ratio because it relies on neither collection nor sales.
Simply put
This ratio asks: if you were asked to pay all your short-term obligations today, how much of them would the cash on hand and in the bank alone cover?
It rarely reaches 1, and it does not need to, because idle cash earns nothing. But a very low ratio together with slow collection is a warning sign for meeting payment dates.
Worked example
An auto parts store has cash on hand and in the bank of 150,000 SAR and current liabilities of 500,000 SAR.
Cash and cash equivalents150,000 SAR
Current liabilities500,000 SAR
Cash ratio = 150,000 ÷ 500,0000.3 times
Formula: Cash and cash equivalents ÷ current liabilities
Don't confuse it with
Quick ratioThe quick ratio adds receivables to cash, and the cash ratio does not.