Definition:

Cash refers to the money that a company has in its bank accounts or on hand. Cash equivalents are short-term, highly liquid investments that are easily convertible to known amounts of cash and have original maturities of three months or less. Short-term investments are financial instruments that can be easily converted into cash, typically within a year.

Examples

Cash: Currency, bank balances.

Cash Equivalents: Treasury bills, commercial paper, money market funds.

Short Term Investments: Certificates of deposit (CDs), marketable securities, short-term bonds.

Formula:

There is no specific formula for cash, cash equivalents, and short-term investments, as they are line items on the balance sheet. However, they are often summed up as:

Total = Cash + Cash Equivalents + Short Term Investments

How to use the metric:

These metrics are used to assess a company's liquidity position, indicating how well a company can meet its short-term obligations. They are crucial for financial analysis, helping investors and analysts evaluate the financial health and operational efficiency of a business.

Limitations:

These metrics do not provide insights into the long-term financial health of a company. They can be temporarily inflated by short-term borrowing or asset sales, potentially misleading stakeholders about the company's actual liquidity position.

Applies to:

These metrics are applicable across all industries, particularly those with significant cash flow operations like retail, manufacturing, and technology, where liquidity is crucial for day-to-day operations.

Doesn't apply to:

There are no specific industries where these metrics do not apply, but they may be less relevant for industries with inherently low liquidity needs, such as certain service sectors, where cash flow is more predictable and stable.

Summary:

Cash, cash equivalents, and short-term investments are key indicators of a company's liquidity and ability to meet short-term obligations. While they are essential for assessing financial health, they should be considered alongside other financial metrics to gain a comprehensive view of a company's overall financial position.