GLOSSARY // Fundamentals
Cash Ratio
The cash ratio is the strictest liquidity test on the balance sheet: cash and cash equivalents divided by current liabilities, ignoring receivables and inventory entirely. It measures whether the company could pay everything due this year with money it holds right now.
Few healthy companies score above 1.0, and few should — parking enough idle cash to prepay a full year of liabilities drags on returns. The ratio earns its keep in stress analysis: for a company burning cash or facing a credit crunch, receivables that collect in 60 days do not cover a payroll due Friday.
Read it alongside the current and quick ratios; the three together show how much of the liquidity cushion is actually liquid.
A company holds $150M in cash and equivalents against $250M in current liabilities: cash ratio = 150 / 250 = 0.6. It can cover 60% of the year's obligations from the vault today, with receivables and inventory expected to fund the rest as they convert.
Related terms
Educational only — not financial advice. Definitions simplified for clarity; markets are messier than definitions.