What is a bad cash ratio?
A cash ratio of less than 1 means you have more current liabilities than cash on hand. However, that is not necessarily a bad sign. You may still have enough current assets (accounts receivable and inventory) on hand to cover your company's current liabilities.
0.2 is considered to be the ideal cash ratio.
There is no ideal figure, but a ratio of at least 0.5 to 1 is usually preferred. The cash ratio may not provide a good overall analysis of a company, as it is unrealistic for companies to hold large amounts of cash.
If the cash ratio of a company is equal to 1, it means the company has the same amount of current liabilities as the cash assets required to pay them off. If it is greater than 1 then the company is likely in good health and has enough funds to cover its short-term debts, while the risk of default is also very low.
A: A higher cash ratio means that a company has more liquid capital available and lower short-term liabilities in need of payment, while a lower cash ratio means that there is a higher amount of liabilities and less cash on hand as an asset. Therefore, it is more desirable to have a higher cash ratio than a lower one.
A good current ratio is between 1.2 to 2, which means that the business has 2 times more current assets than liabilities to covers its debts. A current ratio below 1 means that the company doesn't have enough liquid assets to cover its short-term liabilities.
A good cash ratio is between 0.5 to 1.0. If the company has a cash ratio below 0.5, it may not have enough money to repay its debts.
Key Takeaways
Whether or not a debt ratio is "good" depends on the context: the company's industrial sector, the prevailing interest rate, etc. In general, many investors look for a company to have a debt ratio between 0.3 and 0.6.
On the other hand, suppose Company B has total liabilities of $200,000 and total assets of $1,000,000. The debt ratio for Company B is: Debt Ratio = $200,000 / $1,000,000 = 0.2 or 20% Company B has a lower debt ratio, indicating a more conservative financial structure with less risk.
Higher Cash Ratios indicate less credit and liquidity risk, but if a company's ratio is too high, it could indicate mismanagement or misallocated capital. As with the other Liquidity Ratios, context is king for understanding the Cash Ratio.
What is the current cash ratio?
The current ratio is a liquidity ratio that measures a company's ability to pay short-term obligations or those due within one year. It tells investors and analysts how a company can maximize the current assets on its balance sheet to satisfy its current debt and other payables.
As you can see, this ratio measures the cash availability of the firm to meet the current liabilities. There is no ideal ratio, it helps the management understand the level of cash availability of the firm and make any changes required.
The cash ratio is a measure of the liquidity of a firm, namely the ratio of the total assets and cash equivalents of a firm to its current liabilities. The metric calculates the ability of a company to repay its short-term debt with cash or near-cash resources, such as securities which are easily marketable.
If a company has a current ratio of less than one, it has fewer current assets than current liabilities. Creditors would consider the company a financial risk because it might not be able to easily pay down its short-term obligations.
A ratio of 0.5, on the other hand, would indicate the company has twice as much in current liabilities as quick assets -- making it likely that the company will have trouble paying current liabilities.
Well, while there's no one-size-fits-all ratio that your business should be aiming for – mainly because there are significant variations between industries – a higher cash flow margin is usually better. A cash flow margin ratio of 60% is very good, indicating that Company A has a high level of profitability.
Generally, a Quick Ratio of 1.0 or greater is considered adequate to ensure a company's ability to pay its current obligations. A value of less than 1.0 signals a problem in meeting short-term obligations.
As a general rule of thumb, a current ratio in the range of 1.5 to 3.0 is considered healthy.
"A current ratio of 1.2 to 1 or higher generally provides a cushion. A current ratio that is lower than the industry average may indicate a higher risk of distress or default," Fillo says. Some businesses may prefer an even higher current ratio, say 2 to 1 or 3 to 1.
What does a current ratio of 1.4 mean? For each $1 of inventory, the company has about $1.40 of current liabilities. For each $1 of current assets, the company has about $1.40 of current liabilities.
Is 0.6 a good debt ratio?
If the ratio is over 1, a company has more debt than assets. If the ratio is below 1, the company has more assets than debt. Broadly speaking, ratios of 60% (0.6) or more are considered high, while ratios of 40% (0.4) or less are considered low.
Alternatively, a ratio above 0.6 or 0.7 (60% to 70%) may produce higher risk and may discourage investment. The ratio value of 1.0, indicated that the total debts equal the total amount of assets.
Key Takeaways
The calculation considers all of the company's debt, not just loans and bonds payable, and all assets, including intangibles. If a company has a total debt-to-total assets ratio of 0.4, 40% of its assets are financed by creditors, and 60% are financed by owners' (shareholders') equity.
From a pure risk perspective, lower ratios (0.4 or lower) are considered better debt ratios. Since the interest on a debt must be paid regardless of business profitability, too much debt may compromise the entire operation if cash flow dries up.
A company's debt ratio can be calculated by dividing total liabilities by total assets. A debt ratio of more than 1.0 or 100% means that the company has more liabilities than assets, and a debt ratio of less than 1.0 or 100% means that the company has more assets than liabilities.
