Cash to Current Assets Ratio

Cash to current assets is a liquidity ratio. Liquidity ratios measure a company’s ability to meet financial obligations when due. In the short-term can the company pay all bills when due?

Cash to current assets is a liquidity ratio that measures how much of the current assets in a company are made up of cash and cash equivalents.

The current assets of a company refer to any asset that can quickly be sold or consumed in less than twelve months. Companies depend on such assets to pay for their day-to-day operations, such as employees’ salaries and other short-term liabilities.

Current assets include cash and cash equivalents, short-term investments such as marketable securities, accounts receivable, inventories, and prepaid expenses. Cash and cash equivalents and marketable securities form the most liquid current assets and can generally be referred to as “cash”. When we compare cash to the total current assets of a company, we get the cash to current asset ratio.

In general, high cash to current assets 1.5 to 3.0 is a good thing. Meaning, the company has sufficient cash to fund day-to-day operations. It can also be an indication that a company is doing a good job of effective accounts receivable management. However, a very high ratio of cash to current assets may indicate that not enough resources are being allocated to growing the company. Rainbow School’s current assets are composed of basically cash; therefore, the ratio of 1.5 is normal.