Cash and other liquid assets are recorded as current assets in the balance sheet. It includes cash at hand/bank, and all assets easily converted into cash, such as financial securities held by a company. Cash & cash equivalents is part of a business’s working capital calculated as the difference between current assets and liabilities (Jamil et al., 2016). As part of the working capital, cash and cash equivalents pay for the day-to-day operating costs of a company. Examples of a company’s operating expenses include purchasing raw materials and supplies, rent, utilities, and advertisement costs.
As part of the current assets, the other purpose of cash & cash equivalents is to repay the short-term financial obligations of a company. Examples of the current financial obligations include accounts payable, short-term debt, income tax accruals, and interest on the debt. Consequently, cash & cash equivalents play an essential role in determining a company’s liquidity (Jamil et al., 2016). A company’s liquidity refers to the financial ability to pay for short-term financial obligations using cash or assets readily convertible into cash. In evaluating a firm’s liquidity, cash and easily convertible assets are used to calculate the quick ratio. The quick ratio measures a firm’s potential pay for short-term financial obligations using cash and readily convertible assets (Jamil et al., 2016). The formula for quick ratio is;
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Quick ratio =
Table 1 : Cash ratio between 2017 and 2020 (Finance Yahoo, 2021).
| Year | Cash & cash equivalents | Current liabilities | Cash ratio ( Cash & Cash Equivalents/Current Liabilities) |
|
2020 |
90,943,000 |
105,392,000 |
0.8629 |
|
2019 |
100,557,000 |
105,718,000 |
0.9512 |
|
2018 |
66,301,000 |
116,866,000 |
0.5673 |
|
2017 |
74,181,000 |
100,814,000 |
0.7358 |
The quick ratio for Apple Inc. remained below 1, implying that the company cannot pay for all the short-term debt using cash & cash equivalents. Apple Inc.’s cash & cash equivalents improved significantly between 2018 and 2019 and remained high in 2020 (Finance Yahoo, 2021). However, cash & cash equivalents’ value may dramatically change due to factors such as a change in interest rate, economic recession, and political instability (Apple Inc., 2020). In 2020, Apple Inc. paid dividends of $ 0.205 quarterly, which is high relative to peers in the industry. A dividend increase is therefore not a priority.
In conclusion, cash and readily convertible assets should be retained to pay for emerging operational costs, investments, and short-term debt. A high cash ratio ensures that a company is safe amidst the risk of an increase in the value of operating expenses and short-term debt due to changes in factors such as a change in interest rate, political instability, and economic recession.
References
Apple Inc. (2020). Apple Inc. 2020 Form 10-K . Investor relations. https://investor.apple.com/investor-relations/default.aspx#tabs_content--2021
Finance Yahoo. (2021). Apple Inc. (AAPL) . Yahoo Finance - Stock Market Live, Quotes, Business & Finance News. https://finance.yahoo.com/quote/AAPL/balance-sheet?p=AAPL
Jamil, S., Anwar, A., Afzaal, N., Tariq, A., & Asif, M. (2016). Determinants of corporate cash holdings: Empirical analysis of Pakistani firms. IOSR Journal of Economics and Finance, 7(3), 29-35.
