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This question is about employer.
What is a good cash ratio for a company?
A good cash ratio for a company is equal to or greater than 1. Cash ratio is the difference between how much cash a company has coming in each month compared to how much they owe in liabilities or short-term debt. Having a higher ratio is a good thing because it means a company is earning enough to cover what they owe each month.
A company with a low ratio may be at risk of default, and may find it difficult to raise the funds needed to get back in good standing; investors don't typically put money into a company that is struggling. An example of a low cash ratio is a value below .5. This means a company has twice as much short-term debt compared to cash coming in.
To calculate the cash ratio, you must divide your company's liquidity or cash flow by your current liabilities or what your company owes. For example:
- Quick Ratio = Current Assets - Inventory / Current Liabilities.
- Low Cash Ratio - Company might have taken on too much of a debt burden, creating more risk of default.
- High Cash Ratio - Company appears more capable of paying off short-term liabilities with its most liquid assets.
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