Cash Ratio Formula

Cash Ratio (Cash Ratio) or often referred to as a cash Asset ratio (Cash Asset Ratio) is a ratio use. To compare a total cash (cash) and the company's cash equivalents obligations of the smooth. This Cash ratio is essentially a refinement of the quick ratio (quick ratio). That is use to identify the extent to which funds (cash and cash equivalents) available to pay off current liabilities or short-term debt. Prospective lenders use this ratio as a measure of the liquidity of the company and how easy the company can cover the short-term debt obligations.

Cash ratio this is the ratio of the most liquidity is tight and conservative against the company's ability in covering short-term debt or obligation if compared to other liquidity ratios-ratio (current ratio and quick ratio). This is because the ratio of Cash only takes into account assets or current assets short-term most liquid, namely cash and cash equivalents are the easiest and quick to use in paying off debt smooth.

The Formula of the Ratio of Cash (The Cash Ratio)

Cash ratio (Cash Ratio) is calculated by sharing the most liquid current assets, namely cash and cash equivalents with smooth obligations. Below is the formula of the ratio of Cash or the Cash Ratio:

Cash Ratio = (Cash + Equivalents Cash)/Debt Smoothly



Note:

• Cash is the entire means of payment which can be used immediately as coins, paper money and balance checking account or savings in the bank.


• Cash equivalents are highly liquid investments, short-term and can be made in cash (cash) in quick time in a certain amount of risk in the absence of significant value changes.


• Debt is a debt the company smoothly to be paid in cash within one year or in the operating cycle of the company.

Example of Calculation of the Ratio of Cash (The Cash Ratio)

XYZ company has current assets as much as $ 100 million of which us $30 million was in cash and USD 20 million is the current account in the bank. While the debt smooth $ 70 million. What Is the Ratio of Cash The XYZ Company?

Note:

Cash and cash equivalents = $ 50 million (USD 30 million + $ 20 million)
Debt smoothly = $ 70 million
Cash Ratio =?

Answers

Cash ratio = (Cash + Equivalents Cash)/debt Smoothly
the ratio Cash = $ 50 million/USD 70 million
Cash Ratio = 0.71 times

So, the ratio of cash in the XYZ COMPANY is 0.71 times

Assessment of the ratio of cash (the Cash Ratio)

From the above examples, note the lower cash ratio XYZ COMPANY is 0.71 times. This means XYZ COMPANY only had cash and cash equivalents to pay 75% duty smooth. The cash ratio is quite high because shows a relatively high cash balances during the year.

The ratio of Cash or the Cash Ratio is actually not so popular in the analysis of liquidity. Such as current ratio and quick ratio because its use is also very limited. Basically, there is no common valuation against the cash ratio. In some countries, the ratio of cash 0.2 considered acceptable. The Cash ratio too high can indicate the use of assets. Which are not maximal for the company because of holding too much cash in their financial balance sheets.