Cash Ratio: Meaning, Importance & How to Calculate - ICICI Direct- ICICI Direct (2024)

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FAQs

What is the significance of cash ratio? ›

Cash ratio is the measure of a company's liquidity. It indicates the company's ability to pay off its short-term debt obligations with its most liquid assets, which are cash and cash equivalents. It is primarily the ratio between the cash and cash equivalents of a company to its current liabilities.

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How much cash ratio is good? ›

There is no ideal figure, but a ratio of at least 0.5 to 1 is usually preferred.

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How do you calculate the cash ratio? ›

How Do You Calculate the Cash Ratio? The cash ratio is calculated by dividing cash by current liabilities. The cash portion of the calculation also includes cash equivalents such as marketable securities.

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What is a good operating cash flow ratio? ›

Operating Cash Flow Ratio Analysis

Generally, a ratio over 1 is considered to be desirable, while a ratio lower than that indicates strained financial standing of the firm.

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Is it better to have a high or low cash ratio? ›

A: A higher cash ratio means that a company has more liquid capital available and lower short-term liabilities in need of payment, while a lower cash ratio means that there is a higher amount of liabilities and less cash on hand as an asset. Therefore, it is more desirable to have a higher cash ratio than a lower one.

What is the difference between cash ratio and special deposit? ›

(a) The cash ratio is the minimum ratio between the cash reserves of the commercial banks and their deposit liabilities to customers. On the other hand, special deposits are the additional cash reserves (over and above minimum cash requirement) that commercial banks are ordered to lodge with the central bank.

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What is a good cash on cash ratio? ›

Q: What is a good cash-on-cash return? A: It depends on the investor, the local market, and your expectations of future value appreciation. Some real estate investors are happy with a safe and predictable CoC return of 7% – 10%, while others will only consider a property with a cash-on-cash return of at least 15%.

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What is the best cash ratio? ›

There is no ideal figure, but a cash ratio is considered good if it is between 0.5 and 1. For example, a company with $200,000 in cash and cash equivalents, and $150,000 in liabilities, will have a 1.33 cash ratio.

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What is a healthy cash flow? ›

A healthy cash flow ratio is a higher ratio of cash inflows to cash outflows. There are various ratios to assess cash flow health, but one commonly used ratio is the operating cash flow ratio—cash flow from operations, divided by current liabilities.

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Is higher operating cash flow better? ›

A higher ratio – greater than 1.0 – is preferred by investors, creditors, and analysts, as it means a company can cover its current short-term liabilities and still have earnings left over. Companies with a high or uptrending operating cash flow are generally considered to be in good financial health.

What is the significance of cash conversion ratio? ›

The cash conversion ratio is a metric that determines the proportion of a business's earnings before interest, taxes, depreciation, and amortization that is converted into operating cash flow for meeting various financial obligations, such as paying off debts or funding investments.