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The cash asset ratio – also known as the cash ratio – is a stringent test of a company's liquidity. The cash asset ratio is computed as cash plus marketable securities, divided by current liabilities. Thus if cash is $50,000, marketable securities are $50,000, and current liabilities are $75,000, the cash asset ratio is (50,000 +50,000)/75,000, or 1.33. The cash asset ratio measures how much cash plus marketable securities (which are highly liquid and considered "near cash") the company has to cover its short-term obligations. The cash asset ratio can be distinguished from the quick or acid-test ratio, which includes accounts receivable in its numerator. The cash asset ratio is a much tougher measure of liquidity than the current ratio, which includes all of current assets, including inventories, in its numerator. Like all financial ratios, the ideal cash asset ratio will vary by industry, company size, and other factors. An excessive cash asset ratio should be discouraged, because the company should be using its extra cash to seek greater returns, not to generate a hefty cash asset ratio. |
