In general, financial ratios can be broken down into four main categories—1) profitability or return on investment; 2) liquidity; 3) leverage, and 4) operating or efficiency—with several specific ratio calculations prescribed within each.
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Cash equivalents are assets which can be converted into cash quickly whereas current liabilities are those liabilities which are to be settled within 12 months or the business cycle. Interpretation. A cash ratio of 1.00 and above means that the business will be able to pay all its current liabilities in immediate short term.
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It is an extreme liquidity ratio since only cash and cash equivalents are compared with the current liabilities. It measures the ability of a business to repay its current liabilities by only using its cash and cash equivalents and nothing else. Formula. Cash ratio is calculated using the following formula:
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Liquidity ratios demonstrate a company's ability to pay its current obligations. In other words, they relate to the availability of cash and other assets to cover accounts payable, short-term debt, and other liabilities.
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Related Terms: Balance Sheets; Cash Flow Statements; Income Statements; Return on Assets. Financial ratios are relationships determined from a company's financial information and used for comparison purposes. Examples include such often referred to measures as return on investment (ROI), return on assets (ROA), and debt-to-equity, to name just three.
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Since the accounts receivable turnover ratio used in the days' sales in accounts receivable was based on 1) the credit sales during a one-year time period, and 2) the average accounts receivable balances during that one-year period, the 36 days calculated above is an average.
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Days' receivables ratio: 365/Sales to receivables ratio—measures the average number of days that accounts receivable are outstanding. This number should be the same or lower than the company's expressed credit terms. Other ratios can also be converted to days, such as the cost of sales to payables ratio. Cost of sales to payables: Cost of Sales/Trade Payables—measures the annual turnover of accounts
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The days' sales in accounts receivable ratio, also known as the number of days of receivables, tells you the average number of days it takes to collect an account receivable. Since the days' sales in accounts receivable is an average, you need to be careful when using it. The calculation for determining the days' sales in accounts receivable is the number of days in the year (usually 360 or 365 days is used) divided by the accounts receivable turnover ratio for a specific year.
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A high cash turnover ratio may leave the company vulnerable to creditors, while a low ratio may indicate an inefficient use of working capital. In general, sales five to six times greater than working capital are needed to maintain a positive cash flow and finance sales. LEVERAGE RATIOS
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Cash ratio is the ratio of cash and cash equivalents of a company to its current liabilities. It is an extreme liquidity ratio since only cash and cash equivalents are compared with the current liabilities. It measures the ability of a business to repay its current liabilities by only using its cash and cash equivalents and nothing else. Formula
https://accountingexplained.com/financial/ratios/cash-ratio
days sales in cash ratio definition
The days' sales in accounts receivable ratio, also known as the number of days of receivables, tells you the average number of days it takes to collect an account receivable.