Cash Asset Ratio Formula & Example

Definition: Cash Asset Ratio (CAR) is used to measure a firm's ability to pay its short-term obligations by comparing the firm's cash reserves and liabilities. It is also known as Cash Ratio. However, this ratio ignores the timing of cash received and paid.

Formula:
Cash Asset Ratio = (Total cash + Total marketable securities) / Total short-term liabilities
Or,
CAR = (Cash Equivalents + Cash) / Current Liabilities

Example 1:
MRT Ltd has $430,000 in marketable securities, $270,000 in cash and $500,000 in current liabilities. Then, the cash asset ratio would be: (430,000+270,000) / 500,000 = 1.40. Since the ratio is over 1.0, this is considered to be a positive indicator of the company’s ability to meet current obligations.

Example 2:
Calculate the cash ratio, given the following information:
Cash in hand $70,000
Liquid marketable securities $30,00
Accruals $20,000
Accounts Payable $80,000
Notes Payable $25,000

Solution:
Total short-term liabilities = Accruals + Accounts Payable + Notes Payable = 20,000 + 80,000 + 25,000 = $125,000
Cash Ratio = (70,000 + 30,000) / 125,000 = 0.8

* Next: Fixed Charge Coverage Ratio Analysis
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Kelvin Wong Loke Yuen is an experienced writer with a strong background in finance, specializing in the creation of informative and engaging content on topics such as investment strategies, financial ratio analysis, and more. With years of experience in both financial writing and education, Kelvin is adept at translating complex financial concepts into clear, accessible language for a wide range of audiences. Follow him on: LinkedIn.

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