Cash & Equivalents

Definition:

Cash & Equivalents refer to the total amount of cash on hand and assets that are readily convertible into cash. These are highly liquid assets that a company can use to meet its short-term obligations.

Examples

Examples of Cash & Equivalents include physical currency, demand deposits, treasury bills, money market funds, and short-term government bonds.

Formula:

Cash & Equivalents = Cash on Hand + Demand Deposits + Short-term Investments

How to use the metric:

Cash & Equivalents are used to assess a company's liquidity position. It helps investors and analysts determine how well a company can cover its short-term liabilities and operational needs without needing to sell other assets or raise additional capital.

Limitations:

One limitation of Cash & Equivalents is that it does not provide insight into the company's overall financial health or profitability. It only reflects the liquidity position at a specific point in time and may not account for future cash flow needs or obligations.

Applies to:

Cash & Equivalents apply to all industries, as liquidity is a universal concern for businesses regardless of their sector. However, it is particularly crucial for industries with high volatility or those requiring significant working capital, such as retail or manufacturing.

Doesn't apply to:

There are no specific industries where Cash & Equivalents do not apply, but its importance may be less pronounced in industries with stable cash flows and low liquidity needs, such as utilities or telecommunications.

Summary:

Cash & Equivalents are a key financial metric that provides insight into a company's liquidity and ability to meet short-term obligations. While it is a critical measure for assessing financial health, it should be considered alongside other metrics to gain a comprehensive understanding of a company's financial position.