The cash ratio measures the company’s liquidity. It further refines both the current ratio and the quick ratio by measuring the amount of cash and cash equivalents there are in current assets to cover the company’s current liabilities. This number is useful by comparing with industry averages or other companies to compare liquidity.
Formula for Current Ratio
\[Cash\,ratio = \frac{{Cash\,and\,cash\,equivalent}}{{Current\,liabilities}}\]
Example
Reliance Industries has cash and cash equivalents in the amount of Rs.78,590 and current liabilities of Rs.98,520. This gives a cash ratio of 0.79.
This refers that the company can pay off 79% of its current liabilities without generating additional cash.
