Cash ratio is very similar to the "acid-test ratio" in that it measures how fast cash and marketable securities can pay off current liabilities. It measures a company's liquidity.
The formula is:
Cash Equivalents + Marketable Securities /Current Liabilities
Example:
Adequate Disclosure, Inc. plans to invest into Inadequate Disclosure, Inc. The financial analysts decide that the cash ratio is a great indicator to determine if Inadequate Disclosure, Inc. is worth an investment of $100,000. The industry average is around 80%. Calculate the Cash ratio for Inadequate Disclosure, Inc.
Cash + Marketable Securities / Accounts Payable
$45,000 + $78,000/$156,000 = 78%
Adequate Disclosure, Inc. should not invest into Inadequate Disclosure, Inc. since it is below the industry average of 80%.