The cash ratio is a measure of a company’s liquidity, or its ability to pay off its current liabilities with cash and cash equivalents. It is calculated by dividing the sum of cash and cash equivalents by the total current liabilities. A higher cash ratio indicates that the company has more cash available to meet its short-term obligations, while a lower cash ratio suggests that the company may face liquidity problems.
The cash ratio is one of the liquidity ratios that assess a company’s ability to pay off its current liabilities with its current assets. Unlike the current ratio and the quick ratio, which include other current assets such as accounts receivable and inventory, the cash ratio only considers the most liquid assets: cash and cash equivalents. Cash equivalents are short-term investments that can be easily converted into cash within 90 days, such as marketable securities, treasury bills, and money market funds.
The cash ratio is a conservative measure of liquidity, as it shows how well a company can pay off its current liabilities with its most liquid assets. It is useful for creditors and suppliers who want to evaluate the company’s solvency and creditworthiness. It can also indicate how efficiently the company is managing its cash flow and investing its excess cash.
The formula for the cash ratio is:
A cash ratio above 1 means that the company has more cash and cash equivalents than current liabilities, and can pay off all its current liabilities with cash. A cash ratio below 1 means that the company has less cash and cash equivalents than current liabilities, and may not be able to pay off all its current liabilities with cash. A cash ratio of 1 means that the company has exactly the same amount of cash and cash equivalents as current liabilities.
Procedures in Excel
To calculate the cash ratio in Excel, we need to have the following data:
- Cash and cash equivalents: the amount of cash and short-term investments that can be easily converted into cash within 90 days.
- Current liabilities: the amount of obligations that are due within one year, such as accounts payable, short-term debt, accrued expenses, and taxes payable.
We can use the following steps to calculate the cash ratio in Excel:
- Enter the data in a worksheet, such as the one below:
| A | B | |
|---|---|---|
| 1 | Cash and cash equivalents | 100,000 |
| 2 | Current liabilities | 75,000 |
- In cell C1, enter the formula
=B1/B2to divide the cash and cash equivalents by the current liabilities. Press Enter to get the result.
| A | B | C | |
|---|---|---|---|
| 1 | Cash and cash equivalents | 100,000 | 1.33 |
| 2 | Current liabilities | 75,000 |
- Format the result in cell C1 as a number with two decimal places. You can also add a label in cell A3, such as “Cash Ratio”, and link it to cell C1 with the formula
=C1.
| A | B | C | |
|---|---|---|---|
| 1 | Cash and cash equivalents | 100,000 | 1.33 |
| 2 | Current liabilities | 75,000 | |
| 3 | Cash Ratio | 1.33 |
Example
To illustrate the cash ratio in Excel with real data, let us use the financial statements of Apple Inc. for the fiscal year ended September 26, 2020. You can find the data in the annual report of the company.
The cash and cash equivalents of Apple Inc. as of September 26, 2020, were $38,016 million, and the current liabilities were $105,392 million. We can enter these data in a worksheet, such as the one below:
| A | B | |
|---|---|---|
| 1 | Cash and cash equivalents | 38,016 |
| 2 | Current liabilities | 105,392 |
Using the same formula as before, we can calculate the cash ratio of Apple Inc. in cell C1:
| A | B | C | |
|---|---|---|---|
| 1 | Cash and cash equivalents | 38,016 | 0.36 |
| 2 | Current liabilities | 105,392 |
The cash ratio of Apple Inc. as of September 26, 2020, was 0.36, which means that the company had $0.36 of cash and cash equivalents for every dollar of current liabilities. This indicates that the company had a low level of liquidity and may not be able to pay off all its current liabilities with cash.
Other Approaches
Besides the cash ratio, there are other liquidity ratios that can be used to measure a company’s ability to pay off its current liabilities, such as:
- The current ratio, which is calculated by dividing the total current assets by the total current liabilities. It shows how well a company can pay off its current liabilities with all its current assets, including cash, cash equivalents, accounts receivable, inventory, and other short-term assets.
- The quick ratio, which is calculated by subtracting the inventory from the current assets and dividing the result by the current liabilities. It shows how well a company can pay off its current liabilities with its quick assets, which are the current assets that can be easily converted into cash within 90 days, such as cash, cash equivalents, and accounts receivable.
The current ratio and the quick ratio are less conservative than the cash ratio, as they include other current assets that may not be as liquid as cash and cash equivalents. However, they can provide a more comprehensive picture of a company’s liquidity and its ability to meet its short-term obligations.
Conclusion
The cash ratio is a liquidity ratio that measures a company’s ability to pay off its current liabilities with cash and cash equivalents. It is calculated by dividing the sum of cash and cash equivalents by the total current liabilities. A higher cash ratio indicates that the company has more cash available to meet its short-term obligations, while a lower cash ratio suggests that the company may face liquidity problems. The cash ratio is a conservative measure of liquidity, as it only considers the most liquid assets of the company. It is useful for creditors and suppliers who want to evaluate the company’s solvency and creditworthiness. It can also indicate how efficiently the company is managing its cash flow and investing its excess cash.
To calculate the cash ratio in Excel, we need to have the data of cash and cash equivalents and current liabilities, and use the formula =B1/B2 to divide them. We can also use real data from the financial statements of a company, such as Apple Inc., to illustrate the cash ratio in Excel. Besides the cash ratio, there are other liquidity ratios that can be used to measure a company’s ability to pay off its current liabilities, such as the current ratio and the quick ratio.
