Cash Asset Ratio (CAR)

The Cash Ratio (CaR) or Cash Asset Ratio (CAR) is a method or a formula for capturing the liquidity of a company by comparing company's cash reserves and liabilities.

CAR tells the investor how liquid or implicitly solvent the company is. A company may have a great profit but still be unable to pay its suppliers on time. This ratio analyzes this point of view.

The CAR model measures only the most liquid of all assets against current liabilities and is therefore seen as the most conservative of the three liquidity ratios.

How Cash Asset Ratio CAR is calculated?

Ratio between all cash and cash equivalent assets and all current liabilities.

It excludes both inventory and accounts receivable in comparison to the Current Ratio.

              Cash Equivalents + Cash
Cash Ratio = -------------------------
                Current Liabilities

               Cash Equivalents + Cash
   = ----------------------------------------------
       Accruals + Accounts Payable + Notes Payable

Other names for Cash Asset Ratio CAR

This CAR ratio is also known as the Liquidity Ratio and Cash Ratio.

What Cash Asset Ratio CAR says

The formula is an indicator of the extent to which a company can pay current liabilities, and now the important piece, without relying on the sale of inventory and without relying on the receipt of accounts receivables. It simply tells the investor where the company stands in terms of being able to pay right now.

Disadvantages of Cash Asset Ratio CAR

It is important to remember that Cash Ratio formula ignores timing of both cash received and cash paid out.

Are there any other ratios related to the Cash Ratio?

Yes, finance practicioners use other ratios when they analyze statements. For example the Current Ratio, Return On Assets (ROA), or the Quick Ratio (QuR), also called Acid Test Ratio.