Cash Asset Ratio

What is the 'Cash Asset Ratio'

The cash asset ratio is the current value of marketable securities and cash, divided by the company's current liabilities. Also known as the cash ratio, the cash asset ratio compares the dollar amount of highly liquid assets (such as cash and marketable securities) for every one dollar of short-term liabilities. This figure is used to measure a firm's liquidity or its ability to pay its short-term obligations. Ideal ratios will be different for different industries and for different sizes of corporations, and for many other reasons.

BREAKING DOWN 'Cash Asset Ratio'

The cash asset ratio is similar to the current ratio, except that the current ratio includes current assets such as inventories in the numerator. Some analysts believe that including current assets makes it difficult to convert them into usable funds for debt obligations. The cash asset ratio is a much more accurate measure of a firm's liquidity.

For example, if a firm had $130,000 in marketable securities, $110,000 in cash and $200,000 in current liabilities, the cash asset ratio would be (130,000+110,000)/200,000 = 1.20. Ratios greater than 1 demonstrate a firm's ability to cover its current debt, but ratios that are too high might indicate that a company is not allocating enough resources to grow its business.

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RELATED FAQS
  1. What are some alternative liquidity ratios to the cash ratio?

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  2. What is the relationship between the cash ratio and liquidity?

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  3. What does the cash ratio of a company measure, and how does it affect decision making?

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  4. What are the main differences between the current ratio and the quick ratio?

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