Cash Ratio

What is Cash Ratio

The cash ratio is a financial ratio that measures a company's ability to pay off its short-term liabilities with its most liquid assets, specifically cash and cash equivalents. It is calculated by dividing a company's total cash and cash equivalents by its current liabilities.

The cash ratio is considered to be a more conservative measure of a company's liquidity than the current ratio, which includes all current assets in the numerator. The cash ratio is a good indicator of a company's ability to meet its short-term obligations in the event of a downturn or unexpected financial crisis. A higher cash ratio is generally viewed as a sign of financial strength, while a lower cash ratio may indicate that a company could have difficulty meeting its short-term obligations.

It is important to note that the cash ratio may not provide a complete picture of a company's financial health, as it only considers a narrow range of assets. Other factors, such as the company's ability to generate cash flow, should also be considered when evaluating its financial strength.

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