Category Archives for "Liquidity Ratio"

Defensive Interval Ratio

This is a detailed guide on how to calculate Defensive Interval Ratio (DIR) with thorough interpretation, analysis, and example. You will learn how to use its formula to assess a business liquidity.

Definition - What is Defensive Interval Ratio?

The defensive interval ratio (DIR) is another liquidity ratio that tells us the number of days for which a business can continue operating without using its non-current assets.

Unlike the current ratio which compares a company’s liquid assets to its liabilities (a balance sheet item), this ratio compares liquid assets to operating expenses (an income statement item).

This ratio is called the defensive interval ratio as we use the current assets of a company (also called defensive assets) in its calculation.

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Cash Coverage Ratio

This is an all-in-one guide on how to calculate Cash Coverage ratio with detailed interpretation, analysis, and example. You will learn how to use its formula to evaluate a company's liquidity.

Definition - What is Cash Coverage Ratio?​

As one of the most extreme measures of a company’s liquidity, or its ability to pay out its current debts, the cash coverage ratio, or cash ratioexamines only an organization’s available cash or cash equivalents.

This ratio measures the actual dollar amounts found in a company’s bank accounts, and held in such investments as marketable securities that can be immediately converted into cash.

The ratio then compares these amounts against the company’s current liabilities.

Unlike other coverage ratio calculations, like the quick ratio or the current ratio, this liquidity ratio offers you a much more conservative assessment of how capable a business currently is of servicing its short-term debt load, because it doesn’t take assets like customer receivables or inventory into account.

Since receivables may take weeks or months to collect, and inventory may take years to sell, this ratio may well give you the truest picture of a company’s liquidity position.

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Cash to Working Capital Ratio

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

Definition - What is Cash to Working Capital Ratio?​

As a method for further defining a company’s ability to fund its short-term liabilities, the cash to working capital ratio is another useful tool that’s available to you for evaluating a potential investment.

When you analyze what percentage of a firm’s working capital (WC) is derived from its cash and any cash equivalents, such as marketable securities, you’ll get a far more refined picture of just how liquid the company truly is.

By ignoring any current assets that can’t immediately be converted into cash, you effectively eliminate the possibility that certain short-term resources, such as receivables and inventory, might require a longer lead time to be collected or sold.

This can affect how likely a business is to be able to service its current debts.

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Current Ratio

This is an advanced guide on how to calculate Current Ratio with detailed analysis, interpretation, and example. You will learn how to use this ratio's formula to draw a clearer picture of a company's liquidity.

Definition - What is The Current Ratio?​

One of the mathematical formulas you can use to determine a company’s liquidity, or its ability to pay off its short-term debts, is the current ratio.

Unlike the quick ratio and the more narrowly focused cash coverage ratio that only consider easily "cashable", or quick assets, this ratio takes a broader view of liquidity by including such assets as inventory in its calculation.

By measuring all of a company’s current assets against its current liabilities, you can arrive at a figure that will indicate how likely that company is to have enough resources to support its debts over the next year.

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