Cash Asset Ratio

The cash asset ratio of a company is defined as the current market value of its liquid assets, usually in the form of securities and cash on hand, divided by its current outstanding liabilities. It is generally used in determining a company’s financial health and short-term ability to meet its obligations. While the value of money remains constant for purposes of the cash asset ratio, the value of securities may fluctuate and must be determined as of the time of calculation to ensure accurate figures.

Cash Asset Ratio Formula


The cash asset ratio formula is relatively straightforward, and is derived by adding together all available cash on hand and market securities available for sale and then dividing that figure by the total short-term financial liabilities and obligations the company has incurred. Thus:

• ((total cash on hand) + (total marketable securities)) / (total short-term liabilities) = cash asset ratio

The cash asset ratio formula may vary slightly depending on a number of factors, including which liabilities are deemed short-term and which marketable securities are considered of sufficient liquidity to be included in the cash asset ratio calculation. Essentially, if there is a reasonable expectation that a security will be converted into cash during the course of the next year, it is considered sufficiently liquid to be included in cash asset ratio calculations. Likewise, if financial obligations are expected to come due within the course of the upcoming year, they are considered short-term and may be applied to the cash asset ratio calculation.

Cash Asset Ratio Example


A company which holds $10,000 in liquid marketable securities and has $40,000 cash in hand would have total current assets of $50,000 for purposes of the cash asset ratio calculation. If the company has $40,000 in short-term liabilities for the upcoming year, then the cash asset ratio calculation would appear as follows:

• (($40,000 in cash) + ($10,000 in securities) / ($40,000 in short-term debt))
• $50,000 / $40,000 = 1.25

This would produce a cash asset ratio of 1.25. Ratios over 1.0 are considered a positive indicator of a company’s ability to meet current obligations and continue operations, while ratios under 1.0 are viewed negatively by financial analysts and lenders. However, if the ratio is too far above 1.0, this exceptionally high cash asset ratio may be indicative of a lack of investment in the core business and a lessened ability to grow and expand.

Cash Asset Ratio Calculation


A few key points should be noted regarding the method of calculation for cash asset ratios. The value of market securities is often highly volatile; rarely does it exactly correspond to the amount paid for those securities at the time of purchase. It’s essential to obtain the most current market figures available at the time of calculation in order to reflect the actual value of market securities. Additionally, assets other than cash on hand and marketable securities should not be included in the figures, even if they are expected to be sold in the upcoming year. The cash asset ratio is, as its name suggests, intended to reflect only the value of cash and cash-based assets for the company, not equipment or real property.
Tim Ord
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