What is the cash ratio and how is it interpreted?

The cash ratio is a term that refers to the ability of a company to meet certain debt payments that are due in the short term.

Thus, the ability of the company to face debts in a period of less than 365 days (that is, one year) is shown. Although it has a lot to do with solvency ratioSince both are indicators of the level of ability of a company to take care of its future debts, there are important differences between them.

In the following lines we will make an analysis of this value, its differences compared to the solvency ratio and the formula to calculate it and properly interpret the resulting values.

Table of Contents

What is the cash ratio?

It is a direct measurement of the ability of companies to meet payments that are expected in the short term, that is, payments that must be completed in less than a year.

This information is essential for companies, especially for those that have resorted to external financing and therefore have payment terms that they must meet with their creditors and a series of debts with immediate maturity.

Differences with the solvency ratio

Only debts that must be faced within a period of less than 365 days are considered, that is, debts with short-term maturity. In addition, it only compares the ability to pay using the liquid resources of the company or those that can become liquid quickly, that is, it only measures your immediate solvency.

This easily differentiates it from the solvency ratio, which compares all the assets of the company and its liabilities, in addition to making a general count of the debts, for which it faces the assets and liabilities of the company with all its short and long obligations term.

It may interest you: What is a conformed check?

Formula for calculating the cash ratio

It is calculated in a simple way, following the following formula:

Cash Ratio = Available + Realizable / Current Liabilities

To know the amounts applied to the formula, it is necessary to consult the company’s balance sheet, where the following is known:

  • Available (money).
  • Realizable (goods that can be turned into money quickly).
  • Current liabilities (short-term debts).

The treasury ratio will indicate the amount of money that the company has available to face the payment of debts in cash, compared to pending liabilities.

For example, if the treasury ratio is 3.5, it means that the company in question has 3.5 euros in cash and goods that can be paid quickly, for each euro that it owes within 365 calendar days.

An optimal and healthy value for any company is that the treasury ratio rotates around 1. That is, that its available and realizable are equal to its short-term debts.

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