Definition
The term cash to current assets ratio identifies some metric which enables the investor-analyst to grasp the percentage of cash living in assets. Calculating the bucks to current asset ratio is considered probably the most conservative way of measuring an organizations capacity to settle liabilities.
Calculation
Cash to Current Assets Ratio = (Cash Short-Term Marketable Securities) / Current Assets
Where:
- Short-term marketable securities are temporary investments one company may possibly earn still another provider, with the aid of providing higher yields to its own shareholders.
Explanation
Cash flow measures permit the investor-analyst to comprehend whether the business is generating enough income from ongoing operations to continue to keep the company in a financially sound position within the extended run. One of those techniques to comprehend the power of a business to settle its obligations is always to figure their cash to current assets percentage.
The investor-analyst can calculate an organizations cash to current assets percentage should they desire to know the ratio of assets accounted for with cash. This step assists the investor-analyst to learn whether an organization has enough cash available to pay their debts off or they’d need to count on additional kinds of assets such as accounts receivable, that must be collected from clients.
Calculating an organizations cash to current assets percentage is considered a very conservative perspective of assets, because it gets rid of the requirement to re lay sales of the selection of account receivable from clients. Since short-term and cash securities are a sub set of assets, the ratio may not be above 1.0.
Example
Company ABC’s CFO is more worried with the corporation ‘s capability to fulfill its short-term obligations using cash. The CFO is trying to find a conservative perspective, meaning that she will not need to require the earnings of the selection of account receivable from clients. Even the CFO asked her analytic team to compute the organizations cash to current resources ratio. The analysts withdrew the provider ‘s latest balance sheet, that showed cash of $450,000, short-term marketable securities of $125,000, balances receivable in the amount of $1,153,000 and inventory of $5,670,000.
Calculating the money to present assets ratio:
= ($450,000 $125,000) / ($450,000 $125,000 $1,153,000 $5,670,000)
= 575,000,000 / $7,398,000, or 0.078
