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Cash + Marketable Securities + Accounts Receivable
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Expense Coverage Days =
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(Cost of Goods Sold + Operating Expenses +
Interest Expense)/365
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Explanation of Expense Coverage Days:
Expense Coverage Days estimates the number of days that a company can pay
for its business operations with cash and other liquid assets. This can
also be used to expose situations where the company may be hording
assets, which may be better put to use elsewhere in the company. The
total cash expenditures are divided by 365 to convert the result to days.
Importance of Expense Coverage Days:
An increasing Expense Coverage Days value is generally a positive sign,
indicating the company can pay for its business operations with cash and other
liquid assets for a longer period of time. Knowing how long the company
can continue operations without any influx of cash is very important.
Sometimes markets dry up quickly, poor management decisions send customers
running to their competitors, and unforeseen disasters and events could all
cause cash flows to slow or stop completely. Unless the company can
secure cash or finance their operations another way, they will be left to
survive on their liquid assets.
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