While the cash ratio is a useful measure of liquidity, it has some limitations:
Narrow Focus: The cash ratio only considers cash and cash equivalents, ignoring other liquid assets like receivables and inventories. Industry Variability: Different industries have varying norms for cash ratios. For example, tech companies might have higher cash ratios, while retail businesses might operate with lower ratios. Short-Term Perspective: The cash ratio provides a snapshot of liquidity at a specific point in time, which might not reflect the company's long-term financial health.