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Treasury Bills: $10,000
Marketable Securities: $5,000
Total Current Liabilities: $70,000
Cash Ratio = (50,000+10,000+5,000)/70,000 = 0.93
Company A Cash Ratio = 0.93
Treasury Bills: $60,000
Marketable Securities: $0.00
Total Current Liabilities: $150,000
Cash Ratio = (100,000+60,000)/150,000 = 1.07
Company B Cash Ratio = 1.07
Cash ratio is a company’s ratio of cash and cash equivalents to its total current liabilities. This formula is most often used to gauge a business’ liquidity. Potential investors or creditors frequently look to cash ratio when determining a company’s capacity to repay debts—including how much it could feasibly repay, and how much time it would need to do so.
Most creditors and financial experts consider cash ratios of 1.00 and higher as representative of the optimal range. This ratio level indicates a company’s likelihood of being able to pay its current liabilities within an acceptable period of time.
Typical businesses, however, will commonly have a cash ratio of slightly less than 1.00. This is due to the fact that companies do not generally maintain cash and cash equivalents numbers which equal or exceed their liabilities—as existing idle funds can be utilized to generate more business or revenue.