Cash Ratio I. Liquidity ● live
The cash ratio is the most conservative and stringent of all liquidity ratios. It measures whether a company can meet its current liabilities using only its most liquid assets — cash on hand, bank deposits, cash equivalents (e.g. 90-day T-bills), and immediately realisable marketable securities.
Unlike the current ratio and quick ratio, the cash ratio excludes both inventory and receivables. It answers the harshest possible question: if every creditor demanded payment today and no cash came in from operations or customers, could the company survive?
In practice, most healthy companies intentionally hold a cash ratio well below 1.0x — because sitting on large cash balances is inefficient. This ratio is most useful for creditors, banks, and distress analysts rather than as a primary investment screen.
The three liquidity ratios form a ladder from most inclusive to most conservative:
A company can look healthy on current ratio but fragile on cash ratio if receivables are slow to collect or inventory is illiquid. Analysing all three together gives the fullest picture of liquidity health.
| Range | Signal | What it means |
|---|---|---|
| ≥ 0.5x | Strong | Company holds substantial liquid cash. Creditors and banks highly reassured. |
| 0.2x – 0.5x | Fair | Normal operating range for most companies. Acceptable if current and quick ratios are healthy. |
| < 0.2x | Weak | Very limited pure cash buffer. Monitor alongside CFO and credit facility availability. |
| ≥ 1.0x | Review | Excess cash. Management may be too conservative — consider capital redeployment. |
Note: Unlike current and quick ratios, a cash ratio below 1.0x is not inherently concerning — most well-run companies operate between 0.2x and 0.5x by design.
Source: Damodaran Online, NYU Stern. Tech companies tend to hold more cash; capital-intensive and retail sectors typically hold less.
| Industry | Median | P25 | P75 |
|---|---|---|---|
| Technology | 0.80x | 0.40x | 1.60x |
| Healthcare | 0.70x | 0.30x | 1.40x |
| Financial Services | 0.50x | 0.20x | 1.00x |
| Consumer Goods | 0.30x | 0.10x | 0.70x |
| Energy | 0.30x | 0.10x | 0.70x |
| Manufacturing | 0.30x | 0.10x | 0.70x |
| Real Estate | 0.30x | 0.10x | 0.70x |
| Telecommunications | 0.20x | 0.10x | 0.50x |
| Retail | 0.20x | 0.10x | 0.50x |
| Company | Cash | Cash Eq. | Mkt. Sec. | Current Liab. | Ratio | Signal |
|---|---|---|---|---|---|---|
| Cash-rich tech firm | 80,000 | 40,000 | 30,000 | 60,000 | 2.50x | Review |
| Manufacturing co. | 15,000 | 10,000 | 5,000 | 80,000 | 0.38x | Fair |
| Retail chain | 8,000 | 2,000 | 0 | 55,000 | 0.18x | Weak |
| Safaricom FY2023* | KES 36B | KES 12B | KES 4B | KES 120B | 0.43x | Fair |
* Illustrative figures for context only.
What counts as cash equivalents?
Instruments maturing within 90 days with negligible risk of value change: treasury bills, commercial paper, money market fund shares, and short-term bank deposits. These are listed separately from cash on the balance sheet.
What are marketable securities?
Liquid financial instruments that can be sold quickly at a known market price — government bonds, listed equities held for trading, or short-duration fixed income. Only include securities that can realistically be converted to cash within days.
Is a low cash ratio always a red flag?
No. Most efficient companies deliberately minimise idle cash. A cash ratio of 0.2x–0.4x is completely normal for a well-run manufacturing or retail business. The key question is whether operating cash flows are strong and credit facilities are available. Always read this ratio alongside the Operating Cash Flow Ratio.
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