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customers and debtors. On the other hand, Gibson (2007, p.613) the company
solvency can be
measured
form
its ability to survive
in
the business over
long
term period.
Financial
users
such
as
shareholders
and
long-term creditors
are
having a
great concerned towards the solvency of the company as
it
is
necessary for them to analyze the company’s ability to fulfill their liability such
as
paying the
interest
as
it
comes
due
and
repaying
the
debt
face
value
at
maturity. The cash ratio will be explained as follows:
a)
Cash Ratio
According to Gibson (2007, p.208), the cash ratio is the best indicator to
measure the company’s ability to fulfill its maturing obligations such as
current
liabilities
over
a
short
term period.
It
is
the
most
conservative
method
being
used
by
the
analyst
to
examine
the
liquidity
of
a
firm.
When referring to Palepu et al(1998, p.5-15), unlike quick ratio which
measures the liquidity of accounts receivables, cash ratio is a better
indication
to analyze
the company’s ability to pay
its current
liabilities
in
case when the credit worthiness of the customers is in trouble. However,
analyst
seldom gives
much
weight
to
cash
ratio
when
it
comes
to
evaluating the liquidity of the company. This is due to the fact that it is
unrealistic to expect the company to have sufficient cash equivalents and
marketable securities to pay
for
its current
liabilities (Gibson, p.208).
The
following formula is usually used for calculating cash flows ratio:
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