Cash Ratio Calculator - Glossary:Cash Ratio: Shows the proportion of liquid assets to current liabilities. In simple words, in order to pay off its current debt, the company would have to use all of its cash equivalents and marketable securities.
How to use this equation?This is a balance sheet component; the values are commonly stated against current liabilities and cash equivalents, marketable securities under current assets. To use this ratio, add cash equivalents and marketable securities from current assets and then divide it with current liabilities.
Cash equivalents are any short-term investment securities that have maturity periods of 90 days or less. These include bank certificates of deposit, banker's acceptances, treasury bills, commercial paper, and other money market instruments.
Investments in common stock, preferred stock, corporate bonds, or government bonds, short-term commercial paper and certificates of deposit (CDs) that can be readily sold or redeemed.
On the balance sheet, you will find the total value of current liabilities which consist of accounts payable, tax payable (sales, payroll and other taxes) that are due in short-term.
Cash ratio for a company with a cash equivalents of $10,000, marketable securities of $20,000 and current liabilities of $50,000 is 0.6:1. It means $0.60 of cash equivalents and marketable securities available to cover each $1 of short-term debt (current liabilities).