The Cash Ratio (CAR) method is a
formula for measuring the liquidity of a company by calculating the
ratio between all cash and cash equivalent assets and all current
It excludes both inventory and accounts
receivable in comparison to the
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.
For the Cash Ratio formula,
see the picture on the left.
This CAR ratio is also known as the
Liquidity Ratio and Cash Asset Ratio.
The formula is
an indicator of the
extent to which a company can pay current liabilities without relying
on the sale of inventory and without relying on the receipt of accounts
A thing to remember when using the
CAR formula is that it ignores timing
of both cash received and cash paid out.
Book: Steven M. Bragg - Business Ratios and Formulas : A Comprehensive
Book: Ciaran Walsh - Key Management Ratios -
Compare also: Current Ratio |
| Cash Flow from
Dividend Payout Ratio |
Discounted Cash Flow |
Free Cash Flow |
Economic Value Added |
| Return on Invested Capital |
More financial ratios