Cash-to-Current-Liabilities Ratio: Definition and Example

The cash-to-current-liabilities ratio measures how much of a company’s short-term obligations could be covered immediately using cash and cash equivalents alone.

It is a very conservative liquidity measure because it ignores inventory, receivables, and other current assets that may take time to convert into cash.

How It Works

A simple form is:

cash-to-current-liabilities ratio = cash and cash equivalents / current liabilities

The higher the ratio, the more immediate liquidity the company has relative to bills due within the near term.

Worked Example

Suppose a company holds:

• cash and cash equivalents: $900,000
• current liabilities: $1,500,000

Its cash-to-current-liabilities ratio is 0.60.

That means it has enough cash to cover 60% of its current liabilities without relying on collections, inventory sales, or refinancing.

Scenario Question

A controller says, “If this ratio is below 1.0, the business is automatically in trouble.”

Answer: Not necessarily. Many healthy firms operate below 1.0 because they also rely on receivables, inventory turnover, or ongoing cash inflow.

Related Terms

• Cash Ratio: A closely related conservative liquidity measure.
• Current Ratio: Includes a broader set of current assets.
• Quick Ratio: Sits between the current ratio and cash-only measures.
• Working Capital Ratio: Another perspective on short-term coverage.
• Operating Cash Flow Ratio: Compares cash generation rather than static cash balances with current liabilities.

FAQs