How to read the number
- 1.0 or above. Cash alone could clear the current liabilities. Rare, and usually means the company is sitting on surplus cash.
- 0.5 to 1.0. Comfortable for most trades. The company relies on incoming payments and credit lines to bridge the rest, which is normal.
- 0.2 to 0.5. Thin. The company needs debtors to pay on time, every time. A slow month hurts.
- Below 0.2. Cash alone covers a fifth or less of what is due within the year. One delayed customer or refused overdraft can force a crisis.
Context matters. Retailers turning stock quickly operate on lower cash cover than professional-services firms. That is why the Black Flag Alert profile shows the ratio alongside the sector percentile: weak for the trade, or weak in absolute terms.
Why it matters more than people think
Most insolvencies are not caused by unprofitable businesses. They are caused by solvent businesses running out of cash. A company can show a profit on paper and still miss payroll, because profit includes money not yet received. The cash coverage ratio strips all of that away: it uses only the money the company actually holds.
It is also hard to manipulate. Turnover can be pulled forward, costs capitalised, and provisions timed. The cash figure on a balance sheet is what sat in the bank at the year-end. When the cash ratio collapses while reported profit holds steady, that divergence itself is a warning worth investigating.
Where it sits in the R-Score
The cash ratio is one of the five metrics in the asset quality component of the R-Score, weighted alongside the current ratio, acid test and debtor and creditor days. It is the strictest of the liquidity measures, and a collapse in it drags the component down fast.
The cash coverage ratio is computed and explained on every company profile with filed accounts. Search any company and read five years of it free.