Definition of cash coverage ratio:
Cash coverage ratio is the ratio that measures the company's ability to pay its current liabilities using the cash the company owns, and in this case,
The higher the solvency ratio or cash coverage ratio, the greater the company's ability to pay its current liabilities using the cash that the company has.
, A cash coverage ratio of less than 1 means that the company's cash assets and cash equivalent are not sufficient to pay off the company's current liabilities, for example 0.5 means
That the company is only able to pay 50% of its current liabilities using cash assets and their equivalent assets owned by the company, equal to more than 1, and this
Means that the company's cash and equivalent assets are greater than its current liabilities, for example 1.2 means that the company is able to pay all its current liabilities
It has a cash and asset equivalent surplus of 20 percent after all liabilities are paid. Soft.
Cash Coverage Ratio Formula: -
ccr = (Cash + Assets Equivalent to Cash): Total current liabilities
Cash equivalent (assets equivalent to cash) are other assets and investments that can be converted into cash within 90 days or less.
Advantages of cash coverage ratio: -
It can be used to measure a company's liquidity
Used to calculate cash and cash equivalents owned by the company
ccr is simpler and faster to calculate company eligibility than other ratios
Ccr can show the strength and capabilities of a company
It indicates the position of the company
Disadvantages of cash coverage ratio: -
The use of the cash coverage ratio is very limited
A low cash ratio does not necessarily describe a company on the verge of bankruptcy as long as it is not analyzed with other types of ratios, such as fast ratios and current ratios.
It does not give a clear picture of whether the cash held by the good company is higher or lower
Cash cannot be afforded without using the quick ratio and the current ratio