What it means
The measure is sometimes called the cash ratio, and it sits at the tough end of a family of liquidity checks. The current ratio counts everything a business could turn into cash within a year, the quick ratio drops stock out of the calculation, and the cash asset ratio drops receivables too.
What survives in the numerator is cash in hand, money in current and deposit accounts, and marketable securities such as treasury bills or money market funds that can be sold within days without losing value. Anything that depends on a customer paying, or on goods being sold first, is deliberately excluded.
Lenders and credit insurers look at this ratio when they want to know what would happen in a genuinely bad month. If a large customer went under and stock could not be shifted, the cash asset ratio shows how much breathing space the business would still have.
A very low reading is normal for many healthy businesses, particularly retailers and restaurants that collect from customers instantly and pay suppliers on credit. A ratio far above 1.0 is not automatically good either, because idle cash earns little and shareholders may reasonably ask why it is not being invested or returned.
One practical refinement is to look at what sits inside current liabilities before judging the number. Deferred revenue, for instance, is usually settled by delivering a service rather than by paying cash, so a business with a lot of it can look tighter on this ratio than it really is.
In practice
Real-world examples.
Example
A commercial bank reviewing an overdraft renewal calculates a manufacturer's cash asset ratio at 0.08 and asks why. The answer is that a $900,000 machine was bought outright in the final week of the year, and the bank agrees to reassess once the next quarter's figures are in.
Example
A supermarket chain routinely reports a cash asset ratio of around 0.15 and no lender is concerned, because customers pay at the till while suppliers are paid on 45 day terms. The same figure at a construction firm would prompt serious questions.
Example
An activist shareholder in a listed engineering group points to a cash asset ratio of 1.8 as evidence of an over cautious balance sheet. The board responds with a share buyback and a special dividend, bringing the ratio back towards 0.7.
Think of it
“Cash asset ratio is the strictest liquidity test-can you pay current bills with just cash?
Formula
Calculation
Cash asset ratio = (cash and cash equivalents + marketable securities) / current liabilities
A regional logistics company holds $180,000 in its bank accounts and $120,000 in a money market fund it can redeem the same day, giving a numerator of $180,000 + $120,000 = $300,000. Its current liabilities total $750,000, made up of trade creditors, accrued wages, tax and the current portion of a lease.
Cash asset ratio = $300,000 / $750,000 = 0.40. The company can cover 40% of its next twelve months of obligations from cash it already holds.
If $250,000 of those liabilities turns out to be deferred revenue on prepaid haulage contracts, the cash settled portion is only $750,000 - $250,000 = $500,000, and the adjusted ratio becomes $300,000 / $500,000 = 0.60, a noticeably more comfortable picture.Case study
Seen in the real world.
The following case is illustrative and the company is fictional. Alderbrook Textiles, an invented mid sized supplier to fashion retailers, reported a healthy current ratio of 1.9 and its management assumed liquidity was a solved problem. Almost all of that number came from finished stock and from receivables owed by three large retail customers.
When one of those customers entered administration, the fictional company discovered that its cash asset ratio had been 0.06 for over a year. Stock earmarked for that customer could not be resold at anything close to cost, and $1,400,000 of invoices were suddenly worth pennies.
Alderbrook survived on an emergency facility, then adopted a policy of holding cash and money market investments equal to at least 25% of current liabilities. The board accepted a slightly lower return on capital in exchange for not repeating the experience.
Watch out
Common mistakes.
- Including receivables or stock in the numerator, which quietly turns the cash asset ratio back into the quick or current ratio.
- Counting long dated bonds or restricted deposits as marketable securities when they cannot actually be turned into cash at short notice.
- Judging the ratio against a single universal benchmark instead of against the norms of the industry and the company's own history.
Questions
People also ask.
What is a good cash asset ratio?
There is no universal target, though many analysts treat something between 0.2 and 0.5 as comfortable for a business with predictable collections.
How does it differ from the quick ratio?
The quick ratio adds receivables to the numerator, so it is always the higher of the two and assumes customers will pay on time.
Can the ratio be improved quickly?
Yes, and that is part of the problem, because drawing down a facility just before the year end inflates the number without changing the underlying position.
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