What is a Cash Asset Ratio?
Sometimes referred to as a liquidity ratio, the cash asset ratio has to do with the total amount of cash on hand and securities that could be easily turned into cash, after the amount of current liabilities is settled in full. The idea is to ensure that the company is able to handle any debt that shortly will come due, even in the face of unforeseen circumstances. Cash asset ratios are considered to be an excellent means of evaluating the ability of a corporation to deal with short-term debt and still operate at the same level of production. Part of the key to making an accurate cash asset ratio is understanding the nature of any marketable securities. This involves the consideration of two factors. First, the current market value of each of the securities should be verified. Many people make the mistake of using the original purchase price of the security or asset at the current market value. Often, the security is either worth more or less than that initial purchase price. Second, th
