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Cash Asset Ratio

Cash Asset Ratio
BusinessCorporate Finance and AccountingFinancial Ratios

What Is the Cash Asset Ratio?

The cash asset ratio is the current value of marketable securities and cash, separated by the company's current liabilities. Otherwise called the cash ratio, the cash asset ratio compares the amount of highly liquid assets (like cash and marketable securities) to the amount of short-term liabilities. This figure is utilized to measure a firm's liquidity or its ability to pay its short-term obligations.

Formula and Calculation of the Cash Asset Ratio

The cash asset ratio is calculated by separating the sum of endlessly cash equivalents by current liabilities. The formula is as per the following:

Cash Asset Ratio = (Cash + Cash Equivalents)/Current Liabilities

Cash equivalents incorporate all assets that can rapidly be transformed into cash. These incorporate treasury bills, bank certificates of deposit, commercial paper, and other money market instruments. Cash equivalents are highly liquid and have high credit quality.

Current liabilities incorporate accounts payable, short-term debt, dividends payable, notes payable, and current maturities of long-term debt.

Everything that the Cash Asset Ratio Can Say to You

The cash asset ratio is a financial indicator of a company's liquidity. It shows how well of a position a company is in to pay off its short-term obligations. It is an exceptionally conservative calculation in that it just incorporates endlessly cash equivalents and no different assets, to determine how liquid a company is.

Investors and analysts can determine a company's ability to pay off its short-term obligations, like accounts payable and short-term debt, with its most liquid assets by utilizing the cash asset ratio. A cash asset ratio of 1 or more shows a company that is in great financial standing with the ability to pay off obligations through liquid assets. A cash asset ratio below one might show a company in financial distress.

Be that as it may, having a cash asset ratio below 1 doesn't be guaranteed to demonstrate financial difficulty. Similarly as with every financial examination, more than one data point should be assessed before making a judgment on a company's financial health.

The cash asset ratio is a prime illustration of this, as many companies don't keep close by large partitions of cash or cash equivalents, which is viewed as a poor utilization of cash. All things being equal, many companies invest in various ways or funnel the money back into the business.

The Difference Between the Cash Asset Ratio and the Current Ratio

The cash asset ratio is a liquidity ratio and is like another liquidity ratio, the current ratio. The current ratio, nonetheless, incorporates all current assets notwithstanding cash and marketable securities, like inventories. Counting every current asset, in addition to those that are promptly convertible into cash, makes the current ratio a less rigid measure than the cash asset ratio. The cash asset ratio is, thusly, a better measure of a firm's liquidity.

Illustration of the Cash Asset Ratio

For instance, on the off chance that 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. The ratio being over 1 exhibits that the firm can cover its current liabilities in the short term. Companies in various industries have various requirements for liquidity, so acceptable ratios vary starting with one industry then onto the next.

What Is a Good Cash Asset Ratio?

An ideal cash asset ratio would be 1. It shows a company can pay off its short-term obligations with its most liquid assets yet in addition has relatively little cash lounging around that isn't being put to utilize. Nonetheless, every company and industry will have different cash requirements, consequently, there will constantly be various values that are viewed as great.

Highlights

  • Each company and each industry will have different cash requirements, so there is nobody value that is viewed as strong or poor.
  • The cash asset ratio is like the current ratio; be that as it may, the current ratio incorporates every current asset.
  • The cash asset ratio is a financial ratio that looks to determine a company's liquidity by evaluating its ability to pay off its short-term obligations with endlessly cash equivalents.
  • The cash asset ratio is calculated by separating the sum of endlessly cash equivalents by current liabilities.
  • Cash equivalents incorporate things, for example, treasury bills, bank certificates of deposit, commercial paper, and other money market instruments. Current liabilities incorporate things like accounts payable, short-term debt, dividends payable, notes payable, and current maturities of long-term debt.
  • Investors and analysts utilize the cash asset ratio to determine a company's liquidity. A ratio of 1 or more demonstrates a company can pay off its short-term obligations with its most liquid assets, while a ratio of under 1 might show financial difficulty.