Cash Ratio Calculator

1. What is the Cash Ratio Calculator?

Definition: This calculator computes the cash ratio ($ CR $), which measures a company's ability to cover its current liabilities with its cash and cash equivalents, indicating short-term liquidity.

Purpose: Helps businesses, investors, and creditors assess a company's immediate liquidity and ability to meet short-term obligations without relying on other assets.

2. How Does the Calculator Work?

The calculator uses a simple formula to compute the cash ratio:

Formula:

$ CR = \frac{CCE}{CL} $

Where:

$ CR $: Cash Ratio
$ CCE $: Cash and Cash Equivalents (dollars)
$ CL $: Current Liabilities (dollars)

Steps:

Step 1: Determine $ CCE $. Identify the total cash and cash equivalents from the balance sheet.
Step 2: Determine $ CL $. Identify the total current liabilities from the balance sheet.
Step 3: Calculate $ CR $. Divide $ CCE $ by $ CL $.

3. Importance of Cash Ratio Calculation

Calculating the cash ratio is crucial for:

Liquidity Assessment: A higher $ CR $ indicates stronger ability to cover short-term liabilities with liquid assets.
Financial Stability: Provides insight into a company's immediate solvency without relying on inventory or receivables.
Risk Evaluation: Helps creditors and investors gauge the risk of default on short-term obligations.

4. Using the Calculator

Example 1: $ CCE = \$14,400,000 $, $ CL = \$12,000,000 $:

Step 1: $ CCE = \$14,400,000 $.
Step 2: $ CL = \$12,000,000 $.
Step 3: $ CR = \frac{14,400,000}{12,000,000} = 1.20 $.
Result: $ CR = 1.20 $x.

A cash ratio of 1.20x indicates the company can cover its current liabilities 1.2 times with cash and equivalents.

Example 2: $ CCE = \$5,000,000 $, $ CL = \$10,000,000 $:

Step 1: $ CCE = \$5,000,000 $.
Step 2: $ CL = \$10,000,000 $.
Step 3: $ CR = \frac{5,000,000}{10,000,000} = 0.50 $.
Result: $ CR = 0.50 $x.

A cash ratio of 0.50x suggests limited liquidity to cover current liabilities.

Example 3: $ CCE = \$20,000,000 $, $ CL = \$8,000,000 $:

Step 1: $ CCE = \$20,000,000 $.
Step 2: $ CL = \$8,000,000 $.
Step 3: $ CR = \frac{20,000,000}{8,000,000} = 2.50 $.
Result: $ CR = 2.50 $x.

A cash ratio of 2.50x indicates strong liquidity to cover current liabilities.

5. Frequently Asked Questions (FAQ)

Q: What is the cash ratio?
A: The cash ratio ($ CR $) measures a company's ability to pay off its current liabilities ($ CL $) using only cash and cash equivalents ($ CCE $).

Q: What is a good cash ratio?
A: A $ CR $ above 1 indicates sufficient cash to cover liabilities, while a ratio below 1 may suggest liquidity challenges.

Q: Can the cash ratio be negative?
A: No, since $ CCE $ and $ CL $ are typically non-negative, $ CR $ is non-negative.