The cash ratio is a measurement of your company's liquidity, specifically the ratio of your company's total cash and cash equivalents to its current liabilities. Cash equivalents include items such as treasury bills, bank certificates of deposit, paper, and other money market instruments. Current liabilities include items such as accounts payable, short-term debt, dividends payable, notes payable, and current maturities of long-term debt.
This ratio is used to measure your firm's ability to pay off its short-term obligations with cash or cash equivalents. This information is useful to creditors when they decide how much money, they would be willing to loan your company.
A higher cash asset ratio indicates your company has more cash and cash equivalents to pay off its short-term obligations.
A lower cash asset ratio indicates there are more current liabilities than cash and cash equivalents, and there is insufficient cash on hand to pay off short-term debt. This may not be bad news if your company has conditions that skew its balance sheets, such as lengthier-than-normal credit terms with its suppliers, efficiently-managed inventory, and very little credit extended to its customers.
Historically, the companies with higher profits maintain a Cash Asset Ratio ranging between .4% and .8%.