Cash Ratio is a

$$Cash\quad Ratio=\frac { Cash\quad and\quad Cash\quad Equivalent }{ Current\quad liabilities } $$

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**type of Liquidity Ratio**that determines a company’s capacity to meet its**short-term liabilities/debts only with Cash and Cash Equivalent.**It measures the extent to which cash and cash equivalents cover the current liability of the company.$$Cash\quad Ratio=\frac { Cash\quad and\quad Cash\quad Equivalent }{ Current\quad liabilities } $$

**Significance and InterpretationCash and Cash Equivalents**are those assets which in the form of cash or can be converted to liquid cash immediately. For Example,as they can be converted to cash immediately.__Tradable Security and Short-Term Deposits are considered as Cash Equivalents__**Current Liabilities**are the liabilities or debts that are due for payment within a year.

**Cash Ratio = 1:**This implies that the company can meet its current liabilities only with cash and cash equivalents itself.**Cash Ratio < 1:**This implies that the company does not have enough cash and cash equivalent to meet its current liabilities.**Cash Ratio > 1:**This implies that the company has surplus cash and cash equivalents over its current liability.**Ideally, Cash Ratio =1,**a higher value of Cash Ratio indicates that the funds of the company are not utilized efficiently.- However, it should be noted that
**Cash Ratio < 1 does not indicate that the company is in bad shape**as it might be possible that the company has a variety of investments placed that may be converted to cash at the time of need. **Cash Ratio**is the**best measure of Liquidity**as it indicates only liquid cash and cash equivalents. However, it must be noted that this limit may shift depending upon the regulatory reforms and/or type of business.- Cash Ratio = Cash and Cash Equivalents / Current Liabilities
- Current Ratio = Current Asset / Current Liability
**Cash Ratio / Current ratio = Cash and cash Equivalents / Current Assets**

__A ratio of Cash Ratio to Current Ratio shows the proportion of Current Assets that is in most liquid form i.e. is in Cash and Cash Equivalents (shown above).__

### Examples

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**Example 1: **

**M/S ABC Ltd. has Current Assets worth ₹ 520 Cr out of which Cash and Cash Equivalents are ₹ 300 Cr. and Current Liabilities of ₹ 500 Cr. Calculate the Cash Ratio for the company**

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**Solution: **

**Cash and Cash Equivalents =**300 Cr and

**Current Liabilities =**500 Cr.

**Cash Ratio =**Cash and Cash Equivalents / Current Liabilities

**⇨**300 /500

**⇨**3/5

**Hence, Cash Ratio = 3/5 or 0.6**

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**Example 2:**

**The following information is available about M/S XYZ Ltd, find a cash ratio of the firm.**

Sr. No | Particulars | Amount (in ₹ Cr) |
---|---|---|

1 | Accounts Receivable | 400.00 |

2 | Bills Payable | 150.00 |

3 | Inventories | 125.00 |

4 | Cash Balance | 150.00 |

5 | Tax Payable | 50.00 |

6 | Marketable Securities | 100.00 |

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**Solution:**

**Cash and Cash Equivalents =**(Cash Balance + Marketable Securities)

**⇨**(150 +100)

**Hence, Cash and Cash Equivalents =**250 Cr.

**Current Liabilities =**Bills Payable + Tax Payable

**⇨**(150 + 50)

**⇨**200 Cr

**Cash Ratio**= Cash and cash Equivalents / Current Liability

**⇨**250 / 200

**⇨**1.25