How does a cash asset ratio work?We divide the present value of a company’s marketable securities and cash by its current liabilities to calculate its current asset ratio.It is also known as the cash ratio, and it is a comparison between the amount of short-term liabilities and the amount of the most liquid assets.We can use this to determine a company’s liquidity.Additionally, when we talk about its liquidity, we mean its capacity to pay its short-term obligations.We can use the following formula to determine the cash asset ratio:The cash asset ratio is equal to current liabilities divided by cash and cash equivalents. We all know what cash is.However, are cash equivalents known to us?These are assets that we can quickly cash out.Treasury bills, certificates of deposits, commercial paper, and various money market instruments are just a few examples.Due to their high credit quality, cash equivalents are also highly liquid.How can I use the cash asset ratio to my advantage?We can learn a lot about a company’s financial liquidity from its cash asset ratio.As a result, it reveals a company’s capacity to meet its immediate obligations.Since cash and other cash equivalents are the only inputs, the calculation is extremely conservative.It doesn’t take into account any other assets to determine a company’s liquidity.Additionally, accounts payable and short-term debts may be referred to as short-term obligations.These are paid for with the cash asset ratio’s most liquid assets.Let’s say that the ratio of cash to assets is greater than 1.It indicates that the company’s finances are doing well.Using liquid assets, it can pay its short-term obligations quickly.However, if it falls below 1, the business may be having financial difficulties.Additionally, because it is not always the case, we emphasize the word “might” in this context.Before determining a company’s financial health, multiple data points must be evaluated.Is there such thing as an organization that has an excess of money?Because of the potential for investment or expansion, many businesses would rather not store cash and cash equivalents.Is it rational for a business to have too much cash?If you don’t believe me, there is such a thing.Others disagree that cash should be held in reserve on the balance sheet because doing so demonstrates poor cash management when the money could have been used to generate more revenue.Differentiating the cash asset ratio from the current ratio A liquidity ratio that is identical to another liquidity ratio is referred to as the cash asset ratio.The current ratio, on the other hand, takes into account every existing asset in addition to cash and marketable securities like inventory.Any current assets, even those that are not particularly liquid, are taken into account by the current ratio.As a result, it might not be as accurate as the cash asset ratio.Therefore, the cash asset ratio might be a better option to use if you want to know how liquid a company is.
