The cash ratio or money coverage ratio is a liquidity ratio that measures a company’s capability to repay its existing obligations with just cash and cash equivalents. The money ratio is much more restrictive than the current ratio or quick ratio because no additional current stocks may be utilised to repay current debt only money.
This is the reason why a lot of lenders take a look at the money ratio. They would like to find out whether a business maintains sufficient cash balances to cover off all their existing debts as they come due. Creditors also enjoy the fact that stock and accounts receivable have been left from this equation since both these accounts aren’t guaranteed to be accessible for debt servicing. Inventory may take weeks or even years to market and receivables may take weeks to accumulate. Money is certain to be around for lenders.
The money coverage ratio is calculated by adding cash and cash equivalents and dividing by the total current liabilities of a business.