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Cash ratio

Cash Ratio

Description

Cash ratio indicates companies’ ability to cover its’ short-term debts. Data, needed to calculate this ratio, can be collected from the balance sheet. It shows the ability of the company to cover its’ short-term debts at the current time. Cash ratio is the least important ratio of all liquidity ratios. Maintaining a high level of cash assets is not useful for company and its owners.

Norms and limitations

There are no common norms and limitations for cash ratio.

In some cases it is considered a norm for this ratio to not go below 0.2, but we do not recommend relying on this ratio alone. As already mentioned, if cash ratio’s value is too high, it represents a weak assets management within the company, which is holding a huge amounts of cash.

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