Cash ratio is usually discussed when a financial institution or investor is looking to offer a loan to a business. It refers to the liquidity of a business in terms of how easily it can service debt.
You can understand the cash ratio definition better by seeing how it is calculated:
Cash Ratio = Cash or its equivalents / Current liabilities
If the business’ cash ratio is more than 1, it has more cash than loan obligations and vice versa. Since the cash ratio computes only the most liquid resources of a business, it is an important measure of a company’s financial health.