The cash to current liabilities ratio is a liquidity ratio that measures how well a company can pay off its short-term debts using only its cash and cash equivalents. It is calculated by dividing the cash and cash equivalents by the current liabilities. A higher ratio indicates a better liquidity position and a lower risk of default.
Formula
The formula for the cash to current liabilities ratio is:
In Excel, we can use the following formula to calculate the ratio:
=B3/B4
where B3 is the cell that contains the cash and cash equivalents, and B4 is the cell that contains the current liabilities.
Example
Let’s say we want to calculate the cash to current liabilities ratio for Company A, which has the following balance sheet data:
| Item | Amount |
|---|---|
| Cash | $50,000 |
| Marketable Securities | $20,000 |
| Accounts Receivable | $30,000 |
| Inventory | $40,000 |
| Accounts Payable | $25,000 |
| Short-Term Debt | $15,000 |
| Accrued Expenses | $10,000 |
To calculate the cash to current liabilities ratio, we need to add up the cash and cash equivalents, which are $50,000 + $20,000 = $70,000, and the current liabilities, which are $25,000 + $15,000 + $10,000 = $50,000. Then, we can use the formula in Excel to get the ratio:
=B3/B4
where B3 is $70,000 and B4 is $50,000. The result is 1.4, which means that Company A has $1.4 of cash and cash equivalents for every $1 of current liabilities.
Interpretation
The cash to current liabilities ratio shows how easily a company can pay off its short-term obligations using only its most liquid assets. A higher ratio means that the company has more cash available to meet its liabilities, which reduces the risk of insolvency. A lower ratio means that the company may have difficulty paying its debts, which increases the risk of default.
However, the cash to current liabilities ratio should not be used in isolation, as it does not consider other current assets that may also be used to pay off liabilities, such as accounts receivable and inventory. Therefore, it may underestimate the liquidity position of a company that has a large amount of non-cash current assets. Moreover, the ratio may vary depending on the industry and the business cycle, so it is important to compare it with the industry average and the historical trend.
Other Approaches
There are other liquidity ratios that can be used to measure a company’s ability to pay off its short-term debts, such as:
- The current ratio, which is the ratio of current assets to current liabilities. It shows how well a company can use all of its current assets to meet its current liabilities.
- The quick ratio, which is the ratio of current assets minus inventory to current liabilities. It shows how well a company can use its most liquid current assets, excluding inventory, to meet its current liabilities.
- The cash ratio, which is the ratio of cash plus marketable securities to current liabilities. It shows how well a company can use its most liquid assets, including marketable securities, to meet its current liabilities.
These ratios can be calculated in Excel using similar formulas as the cash to current liabilities ratio, but with different inputs. For example, the current ratio can be calculated as:
=B3+B4+B5+B6/B7+B8+B9
where B3 to B6 are the current assets, and B7 to B9 are the current liabilities.
The quick ratio can be calculated as:
=B3+B4+B5/B7+B8+B9
where B3 to B5 are the current assets minus inventory, and B7 to B9 are the current liabilities.
The cash ratio can be calculated as:
=B3+B4/B7+B8+B9
where B3 and B4 are the cash and marketable securities, and B7 to B9 are the current liabilities.
