Cash return on assets = cash flow from operations/ average total assets
The ratio indicates the availability of cash in future; it estimates the amount of cash available and predicts future performance. The ratio is also used to prepare budgets. The ratio can be used internally by business analyst or externally by the investors. The ratio is compared to the firms within the same industry. Higher the ratio, higher is the cash with the company to re-invest in its business whether for updates, replacements or in any other area.
Higher present ratio indicates an expected higher return. Present ratio can hence be used to predict a future cash flow. The ratio does not include any cash spending on assets to be made in the future or the future cost of replacing old assets i.e. no future commitments with respect to assets are included in the cash return to assets ratio. The ratio has no relation to income or profitability.
The ratio includes the current cash flow from operations i.e. the cash from the core business of the firm. The income from investments or interests is not included while calculating the ratio. A company with high cash to assets ratio may still be making loss in the financial year and vice versa a profitable company with low cash in hand i.e. low ratio may end up in cash crunch or would have a bankruptcy risk. The return on assets ratio is calculated taking in account the cash from non operating activities also, adding non-cash income and account receivable and thus, cash return to asset gives more in-depth information about the liquidity of the company for immediate expenses and operations.
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