Company’s immediate liquidity analysis with Cash Ratio

Comparing Cash Ratios of Companies

The cash ratio analyzes liquidity in a more conservative manner, looking at a company’s immediate liquidity. The cash ratio compares only cash and marketable securities to current liabilities, eliminating receivables and inventory from the asset portion.

Cash Ratio = . Cash + Marketable Securities
                         Current Liabilities

To apply the cash ratio to AEW’s and KFs financial information:

A firm is generally not expected to have enough cash equivalents and marketable securities to cover current liabilities. Although this limits the usefulness of the cash ratio, the ratio is helpful for companies that have slow inventory turnover or slow collection of receivables. A cash ratio is too high may indicate that a company is not using its resources productively in its operations. A cash ratio that is too low, however, could indicate a problem with meeting current liabilities. Another limitation of cash ratio is that it contains marketable securities and those may have to be liquidated to pay the debt. As the value of marketable securities is volatile (changes day to day), this ratio (computed based on year-end prices), may not be valid over a longer time horizon.