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Acid Test Ratio

This is a complete guide on how to calculate Acid Test Ratio with in-depth interpretation, analysis, and example. You will learn how to use this ratio formula to evaluate a firm's liquidity.

Definition - What is Acid Test Ratio?

A company’s liquidity measured by the current ratio normally depends on how its inventory is converted into cash in a specific time period.

But the inventory is sometimes overstated and subject to several valuation issues. You should also take into account that inventory takes more time to convert into cash than other current assets.

For that reason, financial analysts and investors are keen on using another liquidity ratio that doesn’t rely on inventory. This ratio is called the acid-test ratio, or the quick ratio.

What makes this ratio useful is that it simply takes the inventory value out of a company’s current assets.

In this article, we’ll look into how to calculate this ratio and how to use it as an effective way to measure a company’s liquidity.

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Cash to Current Liabilities Ratio

This is a detailed guide on how to calculate Cash to Current Liabilities Ratio with in-depth analysis, interpretation, and example. You will learn how to use this ratio formula to assess a company’s liquidity.

Definition - What is Cash to Current Liabilities Ratio?

The cash to current liabilities ratio (also known as the cash ratio) tells us about the ability of a company to settle its current liabilities using only its cash and highly liquid investments.

Highly liquid investments are referred to as investments that can be liquidated within 3 months.

To understand how this ratio works, we must first look at current liabilities of a firm.

Current liabilities are the obligations of a firm that are due within one year.

Although it may vary depending on the type of business, current liabilities usually consist of the following:

  • Accounts payable – Amounts due to be paid for goods and services received
  • Short term debt and/or current portion of long-term debt – Portion of a company’s debt which is due within one year
  • Deferred Revenues – Advance payments received by the firm for goods and services it has not yet delivered to customers
  • Accrued expenses – Amounts that a firm owes but are not included in accounts payable, such as accrued interest on a bank loan.
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Cash to Current Assets Ratio

This is an in-depth guide on how to calculate Cash to Current Assets Ratio with detailed interpretation, analysis, and example. You will learn how to use its formula to evaluate a firm’s liquidity.

Definition - What is Cash to Current Assets Ratio?

The cash to current assets ratio tells us what portion of total current assets is constituted by the most liquid assets of the company – cash and cash equivalents and marketable securities.

To understand the relevance of this ratio, we must first look at current assets of a firm.

A current asset is any asset that can easily be sold or consumed in less than twelve months. They are used to pay for day-to-day operations of a business.

Although it may vary depending on the type of business, current assets usually consist of the following:

  • Cash and cash equivalents – Available for immediate use
  • Short-term investments – Includes marketable securities, debt securities, and other liquid investments
  • Accounts receivables – Money that a firm is yet to receive on selling goods and services to customers on credit
  • Inventories – Includes raw material, work-in-process and finished goods which will eventually be sold to customers
  • Prepaid expenses – Includes payments made for goods and services which are yet to be received
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Cash Ratio

This is a complete guide on how to calculate Cash Ratio with detailed analysis, interpretation, and example. You will learn how to use its formula to assess a firm's liquidity.

Definition - What is Cash Ratio?

The cash ratio is one of the most useful liquidity ratios that you can use to gauge a company’s capacity to cover its short-term debts by using its cash and cash equivalents.

Compared to other liquidity ratios, such as the current ratio and acid test ratio, the cash ratio is more prohibitive since it will only consider cash and cash equivalents as the liquid asset of the company.

Accounts receivable and inventory are left out of the equation since these assets need to be sold or collected before they can be converted to cash.

While the assets as mentioned above bear a price, they may be subject to impairment. At the same time, the price of these assets cannot be determined right away.

Simply put, other current assets are not as good as cash since it’s the company’s most liquid asset.

This ratio is particularly useful when it’s used to determine what percentage of a company’s short-term obligations can be covered by cash alone.

In general, the higher the ratio, the more liquid the company is.

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