Learn with me post 2.7! 📚🤓
🟠 Level: Intermediate
⚙️ Today we’ll be exploring a topic that requires some knowledge of investing but still easily applicable if you get the hang of it!
👉🏼 Today’s topic:
Cash ratio
👉🏼 What does cash ratio mean?
The cash ratio, sometimes referred to as the cash asset ratio, is a liquidity metric that indicates a company’s capacity to pay off short-term debt obligations with its cash and cash equivalents.
Compared to other liquidity ratios such as the current ratio and quick ratio, the cash ratio is a stricter, more conservative measure because only cash and cash equivalents – a company’s most liquid assets – are used in the calculation.
👉🏼 Cash ratio formula
The formula for a company's cash ratio is:
Cash Ratio: Cash + Cash Equivalents / Current Liabilities
Where:
• Cash includes legal tender (coins and currency) and demand deposits (checks, checking account, bank drafts, etc.).
• Cash equivalents are assets that can be converted into cash quickly. Cash equivalents are readily convertible and subject to insignificant risk. Examples include savings accounts, T-bills, and money market instruments.
• Current liabilities are obligations due within one year. Examples include short-term debt, accounts payable, and accrued liabilities.
👉🏼 Interpretation
Calculations less than 1:
If a company's cash ratio is less than 1, there are more current liabilities than cash and cash equivalents. It means insufficient cash on hand exists to pay off short-term debt.
Calculations greater than 1:
If a company's cash ratio is greater than 1, the company has more cash and cash equivalents than current liabilities. In this situation, the company has the ability to cover all short-term debt and still have cash remaining.
While a higher cash ratio is generally better, a higher cash ratio may also reflect that the company is inefficiently utilizing cash or not maximizing the potential benefit of low-cost loans. Instead of investing in profitable projects or company growth. A high cash ratio may also suggest that a company is worried about future profitability and is accumulating a protective capital cushion.
👉🏼 Example
1. 9.6x $LAW (CS Disco Inc)
2. 8.7x $OLO (Olo Inc.)
3. 6.7x $FSRNQ (Fisker Inc)
4. 2.4x $MNST (Monster Beverage Corp)
5. 1.7x $DASH
👋 This concludes todays Intermediate level post! Feel free to ask any questions or tag friends to learn together, thank you for reading and see you tomorrow 👊🏼
⏳ No time or no interest to apply all the information of this large multi-level series yourself? Copy me and enjoy the benefits without the headache! Copying is possible starting at $200, copy open trades and lets enjoy the ride together!
📚 Sources: Investopedia, Corporate finance institute
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