The Doomsday Ratio
Is your company prepared to survive a Doomsday scenario? Without quantifiable measurements in place, it may difficult to know how your business is actually performing. Financial ratios or benchmarks are used to assess the financial health of a company. The company’s financial statements, primarily the income statement and balance sheet, are converted to a standardized format (ratio or percentage) and compared over time, to similar companies or the broader industry.
Liquidity ratios, specifically, are critical financial ratios in times of crisis. Liquidity ratios measure a company’s ability to pay off short-term obligations without raising external capital. Liquidity ratios include the current ratio, quick ratio, days sales outstanding, and the Doomsday Ratio. The Doomsday Ratio is the most conservative, assumes the worst (hence the name), and blatantly ignores any assets of the company except cash and cash equivalents. Calculated as cash and cash equivalents divided by current liabilities, the Doomsday Ratio determines the adequacy of the amount of cash on hand, and it’s most useful when tracked over time.
Financial ratios, including the Doomsday Ratio, are nuanced. An experienced M&A team can help you understand and navigate their impact on your business and operations.