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 amount of highly liquid assets (such as cash and marketable securities) to the amount of short-term liabilities. This figure is used to measure a firm's liquidity or its ability to pay its short-term obligations.
Cash Asset Ratio Explained
The cash asset ratio is a liquidity ratio and is similar to another liquidity ratio, the current ratio. The current ratio, however, includes current assets other than cash and marketable securities, such as inventories. Including all current assets, not just those that are immediately convertible into cash, makes the current ratio a less stringent measure than the cash asset ratio. The cash asset ratio is, therefore, a better measure of a firm's liquidity.
Example of the Cash Asset Ratio
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. Generally, ratios greater than 1 demonstrate that a firm has the ability to cover its current liabilities in the short term, but companies in different industries have different needs for liquidity, so acceptable ratios differ from one industry to another.