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