Definition
The cash ratio is a financial measure that shows whether a company can pay its short-term debts using only its cash and cash equivalents. It focuses on the most liquid assets and shows the company's immediate ability to meet obligations.
Example
For example, if a company has 50,000 in cash and cash equivalents and 25,000 in short-term liabilities, its cash ratio is 2:1. This means the company has twice the cash needed to pay its short-term debts.
Caution
A high cash ratio means strong liquidity, but it may also indicate that the company is not using its money efficiently. Investors should consider other financial ratios as well before making decisions.