2 min read
Definition
The cash ratio is the strictest liquidity measure: cash and cash equivalents divided by current liabilities. It asks whether a business could pay all its short-term debts using only cash on hand, ignoring debtors and stock entirely.
In plain terms
Even the quick ratio counts money owed by customers; the cash ratio counts only actual cash. A ratio of 1 would mean you could clear every short-term liability from cash alone — rare and, for most businesses, unnecessary.
Why it matters
The cash ratio is most relevant when assessing extreme short-term resilience. See quick ratio and current ratio.
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