What is a 1.6 cash ratio?
A 1.6:1 ratio means the company has enough quick assets to cover current liabilities.
As a general rule, a current ratio below 1.00 could indicate that a company might struggle to meet its short-term obligations, whereas ratios of above 1.00 might indicate a company is able to pay its current debts as they come due.
The acid-test ratio, also called the quick ratio, is a metric used to see if a company is positioned to sell assets within 90 days to meet immediate expenses. In general, analysts believe if the ratio is more than 1.0, a business can pay its immediate expenses. If it is less than 1.0, it cannot.
Interpretation of the Cash Ratio
Although there is no ideal figure, a ratio of not lower than 0.5 to 1 is usually preferred. The cash ratio figure provides the most conservative insight into a company's liquidity since only cash and cash equivalents are taken into consideration.
If the cash ratio of a company is equal to 1, it means the company has the same amount of current liabilities as the cash assets required to pay them off. If it is greater than 1 then the company is likely in good health and has enough funds to cover its short-term debts, while the risk of default is also very low.
As a general rule of thumb, a current ratio in the range of 1.5 to 3.0 is considered healthy.
For example, if a company has a current ratio of 1.5—meaning its current assets exceed its current liabilities by 50%—it is in a relatively good position to pay off short-term debt obligations. Conversely, if the company's ratio is 0.8 or less, it may not have enough liquidity to pay off its short-term obligations.
In general, a cash ratio equal to or greater than 1 indicates a company has enough cash and cash equivalents to entirely pay off all short-term debts. A ratio above 1 is generally favored, while a ratio under 0.5 is considered risky as the entity has twice as much short-term debt compared to cash.
In general, a current ratio between 1.5 and 3 is considered healthy. Ratios lower than 1 usually indicate liquidity issues, while ratios over 3 can signal poor management of working capital.
- Cash Ratio: Cash + Cash Equivalents / Current Liabilities.
- Quick Ratio: Current Assets - Inventory / Current Liabilities.
- Current Ratio: Current Assets / Current Liabilities.
What is the difference between quick ratio and cash ratio?
The cash ratio looks at only the cash on hand divided by CL, while the quick ratio adds in cash equivalents (like money market holdings) as well as marketable securities and accounts receivable. The current ratio includes all current assets.
Long-term debt is not included. A higher cash ratio indicates more liquidity to handle short-term debt. However, holding excessive cash can be inefficient if it sits idle rather than being reinvested in growth opportunities. Most analysts recommend a cash ratio between 0.2-0.5.
High current ratio: This refers to a ratio higher than 1.0, and it occurs when a business holds on to too much cash that could be used or invested in other ways.
Generally speaking, a good quick ratio is anything above 1 or 1:1. A ratio of 1:1 would mean the company has the same amount of liquid assets as current liabilities. A higher ratio indicates the company could pay off current liabilities several times over.
A cash ratio below 0.5 is considered low. Companies with a low cash ratio may struggle with covering their short-term debts and have meager growth potential. Their efforts for expansion through research and development, mergers and acquisitions, or other means are limited.
A current ratio of around 1.7-2.0 is pretty encouraging for a business. It suggests that the business has enough cash to be able to pay its debts, but not too much finance tied up in current assets which could be reinvested or distributed to shareholders.
What does a current ratio of 1.4 mean? For each $1 of inventory, the company has about $1.40 of current liabilities. For each $1 of current assets, the company has about $1.40 of current liabilities.
A high ratio (greater than 2.0) indicates excessive current assets in the form of inventory, and underemployed capital. A low ratio (less than 1.0) indicates difficulty to meet short-term financial obligations, and the inability to take advantage of opportunities requiring quick cash.
The company's current ratio is 1.8, meaning it could potentially pay its short-term liabilities 1.8 times using current assets. A current ratio between 1.5 and 3 is considered typical for most industries.
Ratios are normally expressed using whole numbers, so a ratio of 1 to 1.5 would be written as. 10 to 15, and then as 2 to 3 in its simplest form: 1:1.5.
What is a good current ratio for a bank?
A current ratio greater than 1 is considered good as it indicates the bank has more current assets to meet current debt. What does a current ratio tell you? The current ratio tells about a bank's liquidity or ability to pay off short-term debts with its current assets in the next 12 months.
After dividing the sum with the company's current liabilities, you can see whether it can pay off outstanding debts. Anything above 1 shows that a company can pay off outstanding debts and still have a surplus of cash left. There is no ideal figure, but a cash ratio is considered good if it is between 0.5 and 1.
A ratio of 0.5, on the other hand, would indicate the company has twice as much in current liabilities as quick assets -- making it likely that the company will have trouble paying current liabilities.
Current Ratio Definition
This ratio compares a company's current assets to its current liabilities, testing whether it sustainably balances assets, financing, and liabilities. Typically, the current ratio is used as a general metric of financial health since it shows a company's ability to pay off short-term debts.
A good current ratio is between 1.2 to 2, which means that the business has 2 times more current assets than liabilities to covers its debts. A current ratio below 1 means that the company doesn't have enough liquid assets to cover its short-term liabilities.
