Cash Ratio a Good Measurement for Liquidity in Stocks Trading


Strong Cash Ratio Shows Company is in Good Shape

What is your cash position in the bank? After paying your all current bills, do you still have a sufficient balance? Then you will be considered highly liquid, mean your assets are present in cash or they can be converted into cash easily.



Liquidity what does it Mean?

Liquidity means the quantity, to which a security or an asset could be purchased or sold in a market without affecting a price of the asset. By the highest level trading activity liquidity is characterized. The assets that you can buy and sell easily are called liquid assets. There is no particular formula for measuring liquidity; however, liquidity may be calculated by cash ratio.

That investor of the stock market, who are in search of potential investment must considerate on a liquidity of a company. Companies that have had good liquidity can face the hit of the economy.

How can investors measure liquidity?

Many ratios solve the investor liquidity issue, some are being mentioned below:

Conservative Ratio

The conservative ratio to measure liquidity is “the cash ratio”. It is frequently used during the economic turmoil.

Easy to measure:

Cash + Marketable securities / Current liabilities.

What are Current Bills?

All the bills that you have to pay during one year period, for example, bills to suppliers, vendors, and daily operating expenses, etc.
The value of this equation can be fined on a balance sheet of a company. The cash ratio must be close one and more than one is considered better.

Ignores Assets

What is the reason for considering the cash ratio a very conservative analysis of the liquidity of a company, it ignores all values which turn over a minimum once in a year as inventory for most of the companies?

One thing more that investors should consider that the cash ratio overlooks the daily cash production of the business since it sells services and products.

Why Do You utilize the cash ratio?

Ups and downs are the part of any business, so, for difficult times many companies have had cash. This cash is very important asset for the companies.

If a company possesses enough ready cash, then it will be able to bear the sudden drops in business and sales, such kind of drops may put that company out of the business which has less liquidity.

By the cash ratio we can judge the capability of the company to endure difficult times.

When we consider the company’s value, it’s not a good measure to use because it does not include valuable assets like inventory and property.

It’s also not a good one ratio for using, because it does not cover the total strength of the company.

Yet, it is an excellent sign that the company is able for consideration. Because with good cash it can compete the difficult period. But with bad cash ratio survival of a company is impossible during a bad economy.