Cash ratios compare a company's most liquid assets with its current liabilities. A business uses the ratio to determine whether it will be able to meet its short-term obligations - in other words, whether it has sufficient liquidity to continue operations.
Since it excludes inventory (which is included in the current ratio) and accounts receivable (which is included in the quick ratio), it is the most conservative of the liquidity measures. Especially if receivables are readily convertible into cash within a short period of time, this ratio may be too conservative.
The cash ratio is an indicator of the capability of a business to pay off liabilities. It's the ratio of what your business has at its disposal. The parameters involved are cash and current liabilities.
Cash, be literally or an equivalent in investment, is the amount a business has at its disposal. While Current Liabilities are the number of debts of a business at a period. This ratio is fair when there is a higher cash amount than the liabilities.
Cash ratio is calculated as:
Cash ÷ Current Liabilities.
