Ratio, cash current

The ratio of total current assets to total current liabilities is called the current ratio. The ratio of immediately available cash (i.e., cash plus U.S. Government and other marketable securities) to total current liabilities is known as the cash ratio. The current and cash ratios are valuable for determining the ability to meet the financial obligations, and these ratios are examined... 

Determine the current ratio, cash ratio, and working capital for Company E at the given date. 

Criterion 2. Lenders ask the same questions as investors. In addition, lenders are particularly concerned about the company s ability to repay its debt on time—with interest. Lenders are most interested in short-term cash positions, or liquidity, as measured by the ratio of current assets to current liabilities. They are also concerned with the ratio of cash flow (net income after taxes plus depreciation) to interest on debts. 

Two measures of a company s liquidity are the current ratio and the cash (quick) ratio. The current ratio is defined as the current assets divided by the current liabilities, which is a measure of the firm s ability to meet its current obligations from current assets. A comfortable level of... 

The acid-test ratio, also called the quick ratio, is a modification of the current ratio with the aim of obtaining a better measure of the liquidity of a company. In place of current assets, only assets readily convertible to cash, called quick assets, are used. Thus, it is defined as the ratio of current assets minus inventory to current liabilities. Marketable securities, accounts receivable, and deferred income tax assets are considered to be part of quick assets. From Table 16.3, the quick assets for U.S. Chemicals, in millions of dollars, is 4,630 - 1,420 -312 = 2,898. This gives an acid-test ratio of 2,898/4,153 = 0.70, which is not a desirable ratio, since it is less than one. At the end of the year 2000, Monsanto Company had a much better acid-test ratio of 1.35. 

Transactions that change the character of the net working capital but do not affect its value occur in a company. For example, a cash payment of 10,000 for accounts payable reduces both the current asset of cash by 10,000 and the current liabihty of accounts payable by 10,000, leaving the net working capital unchanged. However, this transac tion affects Doth the current and the quick ratios. 

This is usually defined as the ratio that liquid assets (debtors - - cash) bear to current liabilities. The ratio is a measure of the relation of short-term obligations to the funds likely to be available to meet them. 

Liquidity can be expressed as the ratio of liquid assets (cash plus debtors) to current liabilities. Such assets are also known as Quick assets , i.e. capable of swift realization. 

Liquidity ratios are a measure of a company s ability to pay its shortterm debts. Current ratio is obtained by dividing the current assets by the current liabilities. Depending on the economic climate, this ratio is 1.5 to 2.0 for the chemical process industries, but some companies operate closer to 1.0. The quick ratio is another measure of liquidity and is cash plus marketable securities divided by the current liabilities and is slightly greater than 1.0. 

Cash ratio Current assets - inventory/current liabilities 1.0-1.5... 

An alternative to the current ratio is the quick ratio (also known as the acid test). For this ratio, quick assets are defined as assets that are easily converted to cash. Therefore, inventories and prepaid expenses (such as prepaid rent and insurance policies) are not included in calculating assets. Because the quick ratio considers only assets that are easily converted to cash (and therefore can be used to pay bills, etc.), it provides a better picture of a company s liquidity and its ability to meet its financial obligations. 

The standard quick ratio that any organization strives to obtain is at least 1.0. Simply put, having a quick ratio of greater than 1.0 means that the organization has more quick assets than it has current liabilities. On the other hand, having a quick ratio of less than 1.0 means that the cash that organization has on hand would not be sufficient to pay all its current liabilities, particularly its short-term bills and other obligations. 

Only the most liquid of assets are included in this ratio, and the best ratio is usually 1 1, but this varies with the industry concerned. Table 9.12 calculates the acid-test ratio. Although the Blue company has a better current ratio than the Gold company, it does not have a better acid-test ratio, and, therefore, may have to sell its inventory at discounted prices in order to raise cash for current debt that is due. The Gold company, which did not have a favorable current ratio, does have an acceptable acid-test ratio because most of its current assets are in cash, accounts receivable, and marketable securities. 

Cash, A/R, and S/T securities Current liabilities Quick ratio... 

Although working capital, the current ratio, and the acid-test ratio are effective ways to analyze a firm s liquidity, they should not be the only tools employed. The statement of cash flows is as viable as these ratios for analyzing liquidity. 

Two measures of a company s liquidity are the current ratio and the cash (quick) ratio. 

The cash or quick ratio expresses the ability of a company to cover from its assets an emergency. It is the cash plus marketable securities divided by the current liabilities. Atypical figure is greater than 1.0. 

Let us now consider the following example. ABC pic has issued a 5-year convertible bond with a market price of 112.2 and an underlying share with a market price of 0.65. The bond has also a coupon of 5.5%, while the dividend yield of the underlying stock is 2%. If an investor buys just 1 00 and the bond may be converted into 1 51.7 shares, the premium over a direct purchase of the ordinary shares expressed in basis points is equal to (112.2 - 98.6) or 1 3.6 per bond, in which 98.6 is obtained by multiplying the conversion ratio of 151.7 by the current stock price of 0.65. The compensation for this premium is the cash flow differential between the convertible and underlying shares, which is calculated as ( 1 00 x 5.5%) -(98.6 x 2%) or 3.5. The payback period measure is 13.6/3.5 or 3.86 years and the concept is similar to payback period used in corporate finance analysis. 

The current ratio is defined as current assets divided by current liabilities. It is an indication of the ability of a company to meet short-term debt obligations. The higher the current ratio, the more liquid the company is. However, too high a ratio may indicate that the company is not putting its cash or equivalent cash to good use. A reasonable ratio is two, but it is better to compare current ratios of companies in a similar business. From Table 16.3, the current assets ratio of U.S. Chemicals is 4,630/4,153 = 1.11, which is alow value. At the end of the year 2000, Monsanto Company had a much better current ratio of 1.80. 

Current ratio is a liquidity measure computed by dividing the current assets by current liabilities it measures short-term solvency or the ability of a firm to meet current liabilities. Because current assets include inventory that may or may not be convertible into immediate cash, the quick ratio is frequently used in addition to the current ratio. The quick ratio is calculated by dividing cash plus marketable securities and discounted receivables by current liabilities. Satisfactory values for these two ratios are 1.2-2.0 for current ratio and 1.0-1.2 for quick ratio. 

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