Tag Archives | current ratio

Net Cash

See Also:
Current Ratio Analysis
Quick Ratio Analysis
Financial Ratios
Current Liabilities
Debt Ratio Analysis

Net Cash Definition

The net cash formula is cash minus the liabilities. It is often used in business much like the current ratio. It determines a company’s ability to pay off its obligations. You can also use it to determine the amount of cash remaining after different transactions.

Net Cash Meaning

Net cash is generally used in testing for a company’s ability to pay off its liabilities. Many investors use this because it is an easy measure and understand if an investment is suitable for taking on. If a company can pay off all or the majority of its liabilities with solely cash then the investment can be considered safe. Its ratio can also be used to determine how much debt a company can take on to support operations or projects. If a company is looking at transactions then it can tell how profitable those particular transactions are for the company. It can also tell whether or not it is suitable for a company to continue going through those transactions.

If you want more tips on how to improve cash flow, then click here to access our 25 Ways to Improve Cash Flow whitepaper.

Net Cash
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Financial Ratios

See also:
Quick Ratio Analysis
Price to Book Value Analysis
Price Earnings Growth Ratio Analysis
Time Interest Earned Ratio Analysis

Use of Financial Ratios

Financial Ratios are used to measure financial performance against standards. Analysts compare financial ratios to industry averages (benchmarking), industry standards or rules of thumbs and against internal trends (trends analysis). The most useful comparison when performing financial ratio analysis is trend analysis. Financial ratios are derived from the three financial statements; Balance Sheet, Income Statement and Statement of Cash Flows.

Financial ratios are used in Flash Reports to measure and improve the financial performance of a company on a weekly basis.

Financial Ratio Categories

The following five (5) major financial ratio categories are included in this list.

  • Liquidity Ratios
  • Activity Ratios
  • Debt Ratios
  • Profitability Ratios
  • Market Ratios

Liquidity Ratios

Liquidity ratios measure whether there will be enough cash to pay vendors and creditors of the company. Some examples of liquidity ratios include the following:

Activity Ratios

Activity ratios measure how long it will take the company to turn assets into cash. Some examples of activity ratios include the following:

Debt Ratios

Debt ratios measure the ability of the company to pay its’ long term debt. Some examples of debt ratios include the following:

Profitability Ratios

The profitability ratios measure the profitability and efficiency in how the company deploys assets to generate a profit. Some examples of profitability ratios include the following:

Market Ratios

The market ratios measure the comparative value of the company in the marketplace. Some examples of market ratios include the following:

If you want to check whether your unit economics are sound, then download your free guide here.

Financial Ratios, Financial Ratio Categories, Use of Financial Ratios

Financial Ratios, Financial Ratio Categories, Use of Financial Ratios

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Current Ratio Definition

See Also:
Balance Sheet
Current Assets
Current Liabilities
Working Capital Analysis
Quick Ratio Analysis
Net Cash

Current Ratio Definition

The current ratio definition, defined also as the working capital ratio, reveals company’s ability to meet its short-term maturing obligations. Values for the current ratio vary by company and industry. In theory, the larger the ratio is, the more liquid the business is. However, comparing to the industry average is a better way to judge the performance. Quick ratio, current ratio, and other terms are common measurements of cash in a company.

Current Ratio Explanation

Current ratios are a measure of a company’s ability to pay the current debt liabilities. For the lenders, current ratio is very helpful for them to determine whether a company has a sufficient level of liquidity to pay liabilities. They would prefer a high current ratio since it reduces their risk.

For the shareholders, current ratio is also important to them to discover the weakness in the financial position of a business. They would prefer a lower current ratio so that more of the company’s assets can be used for growing business. Although current ratio is an indicator of liquidity, investors should be aware that it can not give us the comprehensive information about company’s liquidity.

Every industry has its own norms of current ratio. The better way to evaluate it is to check a company’s current ratio against its industry average. More importantly, investors should look at the trend of the current ratio of the company, types of current assets the company has and how quickly these can be converted into cash to meet company’s current liabilities.


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Current Ratio Formula

Use the following formula to calculate current ratio:

Current ratio = Current assetsCurrent liabilities

Current Ratio Calculation

When calculated diligently, current assets represent cash and other assets that will be converted into cash within one year. It normally included cash, marketable securities, accounts receivable and inventories.

Current liabilities represent financial obligations that come due within one year. It normally included accounts payable, notes payable, short-term loans, current portion of term debt, accrued expenses and taxes.

For example, a business has $5,000 in current assets and $2,500 in current liabilities.

Current ratio = 5,000 / 2,500 = 2

This means that for every dollar in current liabilities, there is $2 in current assets.

Current Ratio Example

For example, Desmond has started a scrap metal recycling company called Scrapco. Desmond has made a comfortable living for himself by conducting business with accountability and professionalism in an industry where this is not always the case. Recently, the scrap metal market has experienced some distress and prices have varied much more than before. This has caused his cash stockpiles to vary within the market. As a result, Desmond is worried that he may not be able to meet obligations on the debt financing he has taken for his company equipment. This mainly processing machines for the commodities he receives from individuals to put onto the market.

Desmond decides to do a little research and finds out that this issue is a financial ratio called “current ratio”. He then extends his research to using search engines for the keyword “current ratio calculator“. Unsatisfied with the outcome, Desmond speaks to his accountant. His accountant performs the current ratio calculation below:

If:
Assets = $5,000
Liabilities = $2,500

Then:
Current ratio = 5,000 / 2,500 = 2

This means that for every dollar in current liabilities, there is $2 in current assets.

Conclusion

In conclusion, Desmond is happy to hear that he has little to worry about. He would like to increase his current ratio. But he comforted by where Scrapco stands. Furthermore, Desmond knows that lack of cash is one of the main reasons why businesses fail and resolves to decrease unnecessary expenditures and pay more attention to his cash holdings.

Current ratios are just another way of checking your economics or financials. If you want to add more value to your organization, then click here to download the Know Your Economics Worksheet.

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Resources

For statistical information about industry financial ratios, please go to the following websites: www.bizstats.com and www.valueline.com.

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Current Liabilities

See Also:
Balance Sheet
Current Assets
Fixed Assets
Fixed Assets – NonCurrent Assets

Current Liabilities

Current liabilities is a category of liabilities on the balance sheet. The category also consists of debts and other financial obligations expected to be paid or settled within one year or within one normal operating cycle of the business (whichever is longer). The balance sheet also includes a category for long-term liabilities. In this article, we will look at examples of items that would be found in this category and the key ratios to calculate current liabilities.

Examples of Items

Examples of items considered this type of liability include the following:

Key Ratios to Calculate Current Liabilities

You need to have the following key ratios to calculate current liabilities:

If you want to find out more about how you could utilize your unit economics to add more value to your organization, then click here to download the Know Your Economics Worksheet.

current liabilities, Key Ratios to Calculate Current Liabilities

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Financial Jargon

See Also:
Categories of Banks
Finding the Right Lender
Funding Source Versus Lender
How to Manage Your Banking Relationship
Interest Rate
Is it Time to Find a New Bank?

Financial Jargon

My client, Elliott, met a friendly banker at a networking function. The banker told him, “I like your business and would like to loan you and your company money”. Elliott spent time with him because he believed if he got to know him it would be easier to borrow money. But, when the time came for Elliott to borrow the money, the answer he got was no.

Elliott called to tell me he did not get the money and was upset because he thought the banker was his friend. My answer to Elliott was, “he probably is your friend. But, you are not getting what you want from the banker (money) because you are not communicating in his language.”

Elliott got mad during our conversation and said things like banks don’t loan you money unless you really don’t need the money. Then to make matters worse, I told him you, are probably right. He thought just because the banker was his friend and friends help friends in time of need, the money would be his for the having. After we talked a while and he settled down, I told him the problem. Bankers are the individuals who have invaded earth from another planet. They come from the planet known as Financial World. They look and act exactly like the rest of us that inhabit earth with one exception, their language. The language they speak is known as Financial Jargon.

Financial jargon or the language of accounting can make it difficult for the CFO and CEO to work seamlessly together to move the company forward. Learn the language of business in our CFO coaching workshop – the Financial Leadership Workshop.

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What is this Language of Financial Jargon?

Elliott asked, “What is this language of Financial Jargon?” I told him financial jargon is English or any other language spoken on planet earth but the majority of the human race does not understand the meaning of the words bankers speak. He asked, “Are you talking about financial ratios?” I told him yes, and gave him examples such as current ratioreceivables turnover, net working capital, gross margin, debt coverage, and debt to equity, which are just some of the terms in the language of Financial Jargon.

Sure, Elliott owns a business and survived college where he had taken a finance or accounting course. He even told me he had to memorize all the formulas to earn the grade he received. However, he went on to say, nobody told me I needed to understand the true meaning of these ratios to communicate with an alien known as a Bankers.

Ratios Hold Different Meanings for Bankers

Well, I told him these ratios do have different meanings to your banker than you were taught. Not enough time to teach him the entire language so I just explained one. I said debt to equity ratio could be defined as total debt to shareholders net worth. In college, you were taught this shows how leveraged a company is, in that the lower the ratio, the stronger the company.

To your banker, this ratio tells him who really owns your company; you or your creditors. Bottom line, if this ratio is high, your banker feels they are not talking to the owner of the company and will not loan you any money. So, Elliott, before you try to borrow money again, let’s make sure you are presenting your case in banker’s language.

Instead of using financial jargon around the executive team that doesn’t understand that language, break it down for them. Learn how you can be the best wingman with our free How to be a Wingman guide!

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