Cash ratio (likviditetsgrad 3)

The cash ratio, also known in Norway as likviditetsgrad 3, is a financial key figure used to assess a company's ability to meet its short-term obligations out of cash and cash equivalents. It measures the amount of cash and cash equivalents a company has available against its current liabilities.

The cash ratio is a measure of how well a company is able to pay its current liabilities using cash and cash equivalents. Unlike the current ratio (likviditetsgrad 1) and the quick ratio (likviditetsgrad 2), this is an even more restrictive way of measuring liquidity.

How it is calculated

The cash ratio is calculated by dividing the company's cash and cash equivalents by its current liabilities. The formula is as follows:

Cash ratio = Cash and cash equivalents / Current liabilities

What is it used for?

The cash ratio is used to assess a company's liquidity and its ability to pay its short-term obligations at short notice. It gives an insight into how well the company is placed to handle unforeseen financial challenges or payment obligations.

Tips for interpreting the cash ratio

1. Sufficient cash cover. A cash ratio of 1 or higher indicates that the company has sufficient liquidity to cover its current liabilities in cash. This suggests a healthy liquidity position.
2. Low cash cover. A cash ratio below 1 means that the company has limited liquidity available to meet its current liabilities. This may indicate a financial challenge, or a need to improve cash flow.
3. Comparison with industry benchmarks. Compare the cash ratio with industry benchmarks in order to assess the company's liquidity position relative to competitors and to industry practice.
4. Contextual assessment. Take account of the company's specific circumstances, industry and business model when interpreting the cash ratio. Some industries and businesses may require more liquidity than others.

The cash ratio is an important indicator of a company's liquidity, but it should also be assessed alongside other factors such as cash flow, credit policy and the operating cycle in order to give a complete picture of the company's liquidity position.