In this article, I'm going to show you how to calculate a company's cash ratio. So in previous articles, we've talked about ratios such as the current ratio. We take a company's current assets and divided them by current liabilities to see how to position the company is to be able to pay its debts that are going to come due in the next year, but current assets have things like inventory. And so forth. That the company might have trouble selling.
So then we have the quick ratio where we say "Okay, we're going to exclude, things like inventory. We're just going to focus on cash account receivable in highly liquid current assets. The cash ratio is taking it a step further. And just saying, "Look, let's just take cash and cash equivalents and then divide that by the company's current liabilities."
However, sometimes people when they calculate, the cash ratio will not just have cash and cash equivalents in the numerator they also add in a marketable security. So if the company has some short-term Investments, they add that to cash and cash equivalents because you could take short-term Investments and very easily, turn them into cash. So I've seen it both ways.
Okay, so there are two different ways that you can think about calculating the cash ratio, and I'm going to show you each way, and we'll do it with the company Twitter. So, if we take a look at Twitter's balance sheet, on December 31st, 2018 we've got cash and cash equivalents of 1.9 billion dollars. And then we've got current liabilities of 1.5 billion. So we can take this 1.9 billion, and divided it by the current liabilities, which will be our cash Ratio. We could also take the 1.9 billion and add the 4 billion of short-term Investments that are here as a number.
That's another way that sometimes people calculate. So let's do it each way. So if we take the cash and cash equivalents where we just have that alone in the numerator, we have 1.9 billion divided by 1.5 billion of current liabilities. And we'd see that we'd end up with a cash ratio of 1.25. That's, actually pretty high. So that's good. That's meaning that in the short term if we forget about accounts receivable, we forget about anything else, if we just look at cash and cash equivalents Twitter is in a very good position to be able to satisfy the liabilities that are going to come in the next year. They actually have more cash than they do current liabilities. So they're in a good position and have good short-term liquidity.
Now, if we calculate the alternative way where we add to the cash and cash equivalents and the marketable Securities if you remember Twitter had over four billion dollars and by the way, all these numbers are in billions because all the numbers that were in Twitter's balance sheet were in thousands. So that's why I keep writing billions even though they just have nine digits, but ours is seven digits.
So we have over four billion dollars of short-term Investments which are added to the cash and cash equivalents. We're assuming that these short-term Investments could be very easily turned into cash. And so, if we take all that and divide it by the current liabilities, we end up with a much higher number because Twitter had quite a few short-term investments. We end up with a cash ratio of 4.10.
In either case. We see that Twitter as of December 31st, 2018 had very, very strong short-term liquidity. There is a very good position to be able to either use their cash or cash and securities to pay their debts.
