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Cash ratio

Method of calculation

Formula for cash ratio: short-term investments / short-term liabilities

Ratio's description

This ratio indicates to what extent the short-term (current) liabilities can be covered with cash, its equivalents and other pecuniary assets, which can be relatively quickly encashed on the financial market (i.e. the most liquid asset elements). There are no reference values for this ratio thus only the trends of changes can be usually interpreted. However, it is recommended to maintain the value of the ratio at the level of 10%-20% (from the viewpoint of cash management practice).

Ratio's interpretation

  • When assessing the changes in ratio's value over time (over few periods):
    • the increase of ratio's value is interpreted as an improvement of the immediate liquidity, while the decrease is interpreted as a deterioration,
    • maintaining the ratio's value below 10% is interpreted as a threat to the maintenance of financial liquidity.


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