# The Cash Ratio and Stock Investing (includes calculator)

The Cash Ratio provides an indication of a company’s liquidity by measuring the amount of cash, cash equivalents and investments to cover current liabilities. The measure provides investors with a means of determining how quickly the company could satisfy its outstanding liabilities through the liquidation of its cash assets

#### About Liquidity Ratios

Liquidity ratios are measurements that are used to determine a company’s ability to pay off its short-term debt obligations. Generally speaking, the higher the ratio, the greater the margin of safety the company has in covering its short-term debts. A company with a low measures should raise a red flag for investors as it may be an indication that the company will have difficulty running its operations and meeting its financial obligations.

#### A Conservative Measure

Of the three short-term liquidity ratios (current, quick, and cash), the cash ratio is the most conservative as it only considers the company’s most liquid short-term assets. These are the assets which can be most easily used in paying off short-term obligations.

The cash ratio does not include inventory and receivables as these may or may not be converted to cash quickly enough to meet these short-term liabilities.

#### Calculate the Cash Ratio

To calculate the cash ratio, you list the company’s cash and marketable securities along with its short-term liabilities. The formula can be written as:

##### Cash Ratio = (Cash + Marketable Securities) / Current Liabilities

As with any liquidity ratio, generally accepted cash asset ratio values will vary by industry, so the measure is most useful when comparing companies in the same industry. For many investors, though, a cash ratio value of at least 1 is required (a ratio of less than one indicates that the company cannot meet its current liabilities) and the higher the value the better.

To collect data for the calculation, go to Yahoo! Finance. Enter the stock symbol in the *Get Quotes* window. Then select *Balance Sheets* in the lower left-hand corner under *Financials*.

#### The Value Should Not Be Too High

A very high cash ratio can indicate excessive accumulation of funds and bad financial management as this money could be returned to shareholders or used elsewhere to generate higher returns.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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