What does the cash ratio measure?

The cash ratio measures a company's liquidity by calculating the proportion of cash and cash equivalents it has relative to its current liabilities. Specifically, it is defined as cash divided by current liabilities. This metric indicates how well a company can cover its short-term obligations using its most liquid assets, which is crucial for assessing financial health and solvency in the short term.

A high cash ratio suggests that a firm has a strong liquidity position and can easily meet its short-term liabilities without needing to sell off other assets or generate additional cash flow. This is particularly important in times of financial stress or economic downturns when cash availability becomes essential for operations.

In contrast, the other options do not accurately represent what the cash ratio is intended to assess. For example, total assets include all resources owned by the company, which does not specifically relate to cash or liabilities. Current liabilities divided by total cash does not provide insight into how cash can cover those liabilities; it's more a measure of how obligations are structured relative to cash reserves. Cash flow in relation to net income reflects the operational efficiency and profitability rather than immediate liquidity standing.