MONEY9: Today we Let me explain to you, a company’s ledger account (LEDGER ACCOUNT)Cash ratio in (CASH RATIO) What? And how important is it? To find out how strong a company is financially InvestorsOften taking into account its cash ratio as well.
Cash & Cash Equivalent in Companies Balance Sheets (CCE) Is the most liquid current asset. An asset that can be easily used when needed is called a liquid asset. That is, you can call commercial paper, treasury bills and short-term government bonds, etc., which can be sold in less than three months, cash equivalent.
Maximum lending banks or other institutions keep a close eye on the cash ratio of any company. This ratio gives an idea of how much debt a company has and how much it is capable of paying off in the future.
Cash ratio finding formula
The cash & cash equivalents are divided by the total current liabilities to find the cash ratio. Cash ratio can be more or less than one. If the ratio is more than one, assume that the company is able to pay the debt. If the ratio is less than one, then understand that the financial condition of the company has deteriorated.
Thus, many companies are pursuing a policy of maintaining a low cash reserve ratio, as such companies often use the funds for growth. But the cash ratio is less used by analysts in a company’s fundamental analysis. The reason behind it has some limitations of its own.
If a company keeps a huge amount of cash in its balance sheet, it is believed that the company has not used the assets properly. The company could have distributed this amount to the shareholders or invested more elsewhere to earn a higher return than to keep the money. It also looks at how much the cash flow in a business is improving over a period of time.
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