Cash is King

Cash is King

In times of uncertainty like this companies with more than enough cash are seen as safer. This is because even if revenue declines, they will still have enough cash to pay the bills. In addition to cash, liquid assets, which can easily be converted to cash without affecting their market price, can also be a good measure of how safe a company is. The quick ratio is a good measure of this. The quick ratio is defined as (Cash + marketable securities + accounts receivable)/current liabilities. Lets break that down. 

Examples of marketable securities are certificates of deposit, common stock, and most often, government bonds. Marketable securities earn some return but remain very easy to convert to cash. Accounts receivables are when a business delivers a product or service but plans to receive payment at a later date, similar to holding IOUs. Current liabilities are essentially debts the company has to pay within a year.

The quick ratio then is measuring how well a company could meet its short term liabilities using its cash, converting marketable securities to cash, and collecting cash from accounts receivables. If a company has a quick ratio of less than 1, that means that without selling assets, it cannot meet its short term liabilities. Which, in times like this is a major problem. Looking for companies that have an investment grade credit rating and a quick ratio above 1.25 would be a place to start looking for safe companies. Companies that go into downturns with excess cash often perform better as they can acquire struggling companies when their valuations are at their lowest, they have easier times getting loans if they need it, and they are far less likely to go bankrupt.

Before buying a stock it could be a good idea to check the company’s quick ratio.

Stay tuned to read about where I will explore a strategy of buying companies with strong quick ratios and shorting those with weak quick ratios in periods of high market volatility.


More Posts

Taiwan’s Tango 🕺

Taiwan depends more on China for trade than it does on the U.S, China still holds major influence on the state of the Taiwanese econom

Permit 🚘

Self-driving cars have moved from a mere fictional and playful speculation to a reality.

Get your daily Invstr Crunch

Get the market news and updates you need, delivered to your inbox or available on our daily podcast.


Risk Disclosure:

Invstr is not a bank and banking services are provided by Vast Bank, N.A.

Brokerage and Banking services are currently only available to U.S. residents.

Invstr app and web services are provided by Invstr Ltd. Advisory services are provided by Invstr Financial LLC, an investment adviser registered with the Securities Exchange Commission (SEC) details of which can be obtained here. Securities brokerage and custody services are provided by Apex Clearing, a broker dealer registered with the SEC and a member of FINRA and SIPC. There is no bank guarantee on securities and securities may lose value.

Investing involves risk and can lead to losses. Past performance does not guarantee future results.

Vast Bank N.A. a nationally chartered bank and member of the FDIC, provides the banking products, including the products and services related to digital asset accounts. As with any asset, the value of Digital assets can go up or down and there can be a substantial risk that you lose money buying, holding or investing in digital assets. You should carefully consider whether trading or holding Digital assets is suitable for you in light of your financial condition. Any Digital Assets in your digital asset account are not insured by any government entities, including but not limited to FDIC or SIPC.

The Invstr Visa® Debit Card is issued by Vast Bank, N.A. pursuant to a license from Visa U.S.A Inc and may be used everywhere Visa debit cards are accepted. Invstr Ltd, Invstr Financial LLC and Invstr Securities Ltd are subsidiaries of Marketspringpad Holdings (collectively “Invstr”) and Invstr is solely responsible for the application services and website content.

Watchlists provided when users first access the service are not a recommendation to invest. Instead they are provided to help users better navigate the service. Users are free to edit and create their own watchlists. From time to time, Invstr will suggest instruments solely based on an individual’s interest and the interest levels of the Invstr community.The statistical and portfolio builder models generated by Invstr do not reflect actual investment results and are not guarantees of future results.Comments provided by Invstr leaders, influencers or members of the Invstr Community are not recommendations and should not be construed as such.Invstr does not endorse the content or the positions posted by them. Their investment approach, and that of the models provided by Invstr, may be different from yours and may not be appropriate for you.