Financial Ratios Series – Liquidity Ratios Part 4

financial ratios liquidity ratios

“In the midst of movement and chaos, keep stillness inside you.” Deepak Chopra

Cash Ratio

The cash ratio the most conservative ratio than the current and quick ratios. To calculate it, we take the sum of cash & equivalents and marketable securities, and divide it by total current assets.

As you have probably guessed, this ratio indicates a company’s ability to pay all of its current liabilities with its cash and cash equivalents. It’s another way of looking at a company’s short-term liquidity.

The formula to calculate a cash ratio is:

Cash Ratio = (Cash & Cash Equivalents + Marketable Securities) / Current Liabilities

Working Capital

We’ve been looking at short-term liquidity from a ratio perspective. But what if we needed to understand it in dollars? There’s where the working capital calculation comes in.

Working Capital is the difference between current assets and current liabilities. If a company has $100,000 in current assets, and $50,000 in current liabilities, the company’s working capital is $50,000 ($100,000 – $50,000).

The formula for working capital is:

Working Capital = Current Assets – Current Liabilities

This completes our series in Liquidity Ratios. What did you think? Would you like to see more or less? If you have any suggestions to make the content more useful for you, please use the section below and leave a comment. In the end, I want to make CMA Coach a valuable tool that will help you in your exam preparations. And there’s no better way than to hear from you.

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Nathan Liao

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