It is a very important financial metric for those who provide short-term credit facilities to the company. And the cash ratio calculator helps such lenders and investors in analyzing the capacity of the company to meet the timely payment requirements for such short-term credit facilities. Further, it includes creditors supplying goods on credit, lenders of short-term funds, or the people whose payment is yet to be made. Moreover, the cash ratio determines whether the company has sufficient cash to make the payment to its creditors.
The formula for calculating the cash ratio is:
Cash Ratio = Cash and Cash Equivalents / Current Liabilities
How to Calculate using Calculator?
The cash ratio calculator only requires the user to enter the following data:
Cash and Cash Equivalents
Enter the amount of cash and cash equivalents available with the firm. It includes all the cash available with the company in hand and at the bank and all the securities and investments that are highly liquid and can easily be converted to cash.
Current liabilities are the short-term liabilities of the company for carrying out daily operations. And these are held by the company for up to a period of 12 months. It includes trade payables, outstanding expenses, short-term borrowings, overdrafts, and other liabilities for a period of less than 12 months.
In the financial world, generally, a cash ratio of 1:1 is considered good and adequate. A ratio that equals to 1 means the company has an available cash equivalent to current liabilities. Or it has enough cash to make such payment. And that further means the company will not falter in timely payments of its current liabilities. Moreover, it indicates that the normal operations are under no such cash flow stress. A cash ratio of more than 1 means the company has cash and cash equivalents of an amount greater than the current liabilities. This simply means that the company will still have some cash after paying off current liabilities. And a cash ratio of less than one means the company does not have much cash for making payments of current liabilities. And that may lead to operational issues and cash flow stress.
Also Read: Cash Ratio
But this does not mean that company will not pay. One should check the past records of the company and analyze whether the company has made any default in payments. Sometimes the case may be that the credit period of the company for making payments to creditors is a bit longer. In this case, a company would be able to get the credit facilities even if the cash ratio is less than one.
Moreover, though the 1:1 ratio is preferable and comfortable, however, it again depends and varies from company to company, its circumstances, the requirements of the industry within which it is operating, the nature and trend of the credit period for debtors and creditors, and so many other such factors.
Assume that the balance sheet of the company reflects cash and cash equivalents of $40,000. And its current liabilities stand at $25,000. The cash ratio is:
Cash Ratio = 40,000 / 25,000 = 1.6
This means the company has a surplus of funds for paying off current liabilities. Or there is no likelihood of any payment default or operational crunch with regard to funds.
To know more about the cash ratio, refer to the cash ratio