Plain definition
The cash ratio compares cash and cash equivalents, and any specifically included highly liquid investments, with current liabilities. It is a narrow test of immediately available resources, not a measure of all cash expected to arrive.
Illustrative example
Monetary examples use Saudi riyals (SAR). The same principles apply in other currencies.
Cash and equivalents are and current liabilities are , giving a cash ratio of 0.3. The company expects of collections next week, but keeps that separate because a customer promise is not cash today.
Why it matters
Immediate cash can be low without crisis when collections are reliable, or high while a large payment is imminent. The ratio matters because it makes the most liquid protection visible, not because it predicts all liquidity.
Practical consequence
Define cash equivalents and restricted balances, state the date, and compare the result with payment dates and committed facilities. A low ratio may be normal for a business with rapid collections; it does not replace a liquidity forecast.