Superstore Electronics reported the following figures in its 2019 and 2018 financial statements.
Compute the cash ratio for 2019 and 2018. What does the cash ratio measure? Use this information to discuss the business performance of Superstore Electronics.
2019 Cash ratio = (Cash + Cash equivalents) / Total current liabilities
= ($38,500 + $3,000) / $33,200 = 1.25
2018 Cash ratio = (Cash + Cash equivalents) / Total current liabilities
= ($25,000 + $2,000) / $30,000 = 0.90
The cash ratio measures the company's ability to pay current liabilities from cash and cash equivalents. The cash ratio for Superstore Electronics has increased from 0.90 in 2018 to 1.25 in 2019. A cash ratio of 0.90 is good because this measure is the most conservative valuation of
liquidity since it only looks at cash and cash equivalents. A cash ratio of 1.25 indicates that the company may have an unnecessarily large amount of cash supply. Both the cash supply (cash and cash equivalents) and total current liabilities increased from 2018 to 2019. The management of Superstore Electronics should determine if the cash supply is too high. Could excess cash be invested or used to pay current liabilities?
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