Capital Rationing and Profitability Index
In the previous few articles we have come across different metrics that can be used to choose amongst competing projects. These metrics help the company identify the project that will add maximum value and helps make informed decisions to maximize the wealth of the firm. We saw how the NPV rule was better than IRR […]
What is Cost Modelling?
In the previous article, we have discussed how important revenue modeling is and the techniques which are used by companies to ensure that their revenue models are accurate and up to date. Once the revenue modeling is complete, the next step in the process refers to the modeling of expenses. This process is challenging because […]
The Role of Commercial Banks In Liquidity Management
Due to increasing globalization in the world economy, a lot of multinational corporations today have their businesses spread out across several geographies. This creates several management problems for multinational companies. Not only do they have to struggle with the complexity of managing personnel and operations in many countries but they also have to ensure proper […]
What is Single Entry System ? – Pros and Cons
What is Single Entry System ? Single entry accounting systems record only one side of every transaction. This happens because they use one entry to record every transaction. Therefore single entry system does not use nominal and real accounts. The emphasis is on cash and accounts receivable. Single entry accounting system can be described as […]
Subscription-Based Corporate Banking Business
Banking services in general and corporate banking, in particular, have witnessed a lot of innovation in the past few years. Innovations have touched almost every area of banking except the way the products and services are priced. The commercial banking pricing still seems to be anchored to old business models. However, since commercial banks are […]
The cash ratio is limited in its usefulness to investors and financial analysts. It is the least popular of the liquidity ratios and is used only when the company under question is under absolute duress. Only in desperate circumstances do situations arise where the company is not able to meet its short term obligations by liquidating its inventory and receivables and this is when the cash ratio comes handy.
Cash Ratio = (Cash + Cash Equivalents + Marketable Securities) / Current Liabilities
The cash ratio indicates the amount of cash that the company has on hand to meet its current liabilities. A cash ratio of 0.2 would mean that for every rupee the company owes creditors in the next 12 months it has 0.2 in cash. 0.2 is considered to be the ideal cash ratio.
The cash ratio is the most stringent of all liquidity ratios. Hence there are no assumptions made. The cash and cash equivalent figures stated on the balance sheet are facts and so are the current liabilities stated on the balance sheet. Hence there is no assumption about future events that need to occur as per the company’s plan.
The nearest the cash ratio gets to an assumption is that it believes that marketable securities and cash equivalents can be quickly liquidated. Under normal circumstances this is always the case. The only case where liquidation of these securities would be an issue would be the complete failure of the economic system.
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Cash Flow to Debt Ratio – Meaning, Formula, Assumptions and Interpretation
February 12, 2025
