The cash ratio is another calculation used to measure liquidity and is more restrictive than the current and quick ratios with a more limited definition of assets used for the numerator of the calculation.
Your cash ratio is a measure of your immediate liquidity. It gives you a picture of what would happen if you had to pay all your current liabilities immediately. While it is unlikely that you will have to pay all your current liabilities and not have future sales or collections of accounts receivable, this calculation is helpful to understand a "worst case" scenario. The smaller the ratio, the more dire the consequences would be. |