Moneyzine
Contents
/Investment Guides /Risky Asset Conversion Ratio

Risky Asset Conversion Ratio

Moneyzine Editor
Author: 
Moneyzine Editor
2 mins
November 6th, 2024
Advertiser Disclosure

Definition

The term risky asset conversion ratio refers to a measure that assesses the proportion of assets that may be difficult to convert into cash. The risky asset conversion ratio is useful to lenders that want a more accurate assessment of a company's assets.

Calculation

Risky Asset Conversion Ratio = Risky Assets / Total Assets

Where:

  • Risky assets are those assets not readily converted into cash, less applicable depreciation or amortization. Examples of risky assets include intangible assets and equipment that has been customized by the company to accommodate their operating requirements or production processes.

Explanation

Liquidity measures allow the investor-analyst to understand the company's long term viability in terms of fiscal health. This is usually assessed by examining balance sheet items such as accounts receivable, use of inventory, accounts payable, and short-term liabilities. One of the ways to understand the overall liquidity position of a company is by calculating their risky asset conversion ratio.

The risky asset conversion ratio provides the investor-analyst with information in terms of the ability of a company to liquidate certain assets. The value of these risky assets is then divided by the total assets of the company to determine the proportion of assets that might not be as valuable as shown on the company's balance sheet. The types of assets that fall into the "risky" category include intangible assets in addition to equipment and machinery that has been customized by the company and may be difficult to sell in the event of liquidation.

Example

The CFO of Company ABC would like to better understand the value of the company's assets since their revenue forecast indicates it may be a difficult fiscal year for the company. She asked her team to calculate the company's risky asset conversion ratio to determine the proportion of assets not easily converted into cash. Her team categorized the following assets as risky and indicated the value of these assets (net of depreciation or amortization): intangible assets ($3,500,000), customized plant equipment and machinery ($12,750,000). Company ABC's total assets were $125,000,000. The analysts reported the company's risky assets as:

= ($3,500,000 + $12,750,000) / $125,000,000 = $16,250,000 / $125,000,000, or 13%

Company ABC's CFO was relieved to find only 13% of the company's assets could not be readily converted into cash in the event of liquidation. This information will help the CFO negotiate with lenders if the company's revenue forecast is accurate and the company experiences a contraction in sales.

Related Terms

defensive interval, long-term assets to long-term debt ratio, short-debt debt to long-term debt ratio, working capital to debt ratio

Explore Investing Further

  • Trading has never been easier, thanks to the rise of online platforms that enable you to buy and sell various assets at the click of a button. But with so many options available, it can be challenging to decide which platform is right for you.
  • Looking for a way to avoid swap fees while trading forex?
  • By providing instant diversification for your portfolio, investing in ETFs can amplify the potential of any investor, novice or seasoned alike. We scoped the market to curate a list of the best ETF trading platforms available for US investors.
  • Our top beginner's pick for copy trading is eToro. Read on for more details, plus seven good alternatives.
  • Swing trading stocks can be a great way for investors to take advantage of short-term stock market movements and gain significant returns. If you're interested in swing trading, the key to success lies in selecting the right stocks to buy and sell quickly for a profit.
  • The table below lists the best stock picks under $2, listed on public exchanges.
  • The table below lists the best stock picks under $1, listed both on public and OTC exchanges.
  • This section will highlight the best EV-trading penny stocks available in the United States.
  • The demand for sustainable energy has grown rapidly in recent years. This has resulted in increased scrutiny of the automotive market. As a result, the electric vehicle (EV) industry has made significant advancements.
  • Intelligent Bio Solutions Inc. is a life sciences company, founded in 2016 with headquarters in New York and is engaged in performing diagnostic tests, real-time monitoring, and non-invasive surgery for its patients. The firm has developed a CoV-2 Biosensor, which can be used in RNA virus detection.
  • Hour Loop was founded in 2013 with headquarters in Redmond, Washington. It’s an online retailer involved in e-commerce in the United States that hit the public markets on Jan 7th of 2022. The company sells home/garden decor, electronic products, kitchenware, and apparel through walmart.com, amazon.com, and hourloop.com.

Related Content

  • Biden Or Trump: Who Is Better For The Economy And Stocks?
    Yup. This is one of those articles. It's an election year, and here in the U.S., we get to decide which old dude who’s been alive long enough to remember when there were only 48 states in the U.S. will be the leader of the free world.
    March 19th, 2024
  • When it comes to strategic business planning, accounting is front and center, shaping the course of action. At least it should be.
    March 14th, 2024
  • How To Invest in Real Estate Without Becoming a Landlord
    We all know that in order to build wealth and prepare for retirement, investing is the key. However, it can be hard to figure out what to invest in and how to put your money to good use. One of the most talked about ways to build wealth is owning property and being a landlord to bring in passive income. But what if you don’t want to do that? You can still invest in real estate!
    November 15th, 2024
  • Investing In Nature: The Closest You'll Get To Your Money Growing On Trees
    ESG (Environmental, Social, and Governance) has become a polluted word for many traders and investors - but that doesn't mean it's going completely away. Nor does that mean you can't profit from nature or sustainable practices. But there are some opportunities in the regenerative ag, conservation, and green real estate spaces.
    February 29th, 2024
  • How to Invest $100 and Grow it to 6 Figures
    Turning $100 into six figures is a goal no one should realistically have. But it's the question you might ask yourself: Can it be done? Sure. Probable? It's less probable than winning the lottery, but technically still probable - like finding a needle in a haystack the size of Canada. But possible? Absolutely.
    October 29th, 2024

Contributors

Moneyzine Editor
The Moneyzine editorial team consists of writers and content specialists with diverse backgrounds.
Moneyzine 2024. All Rights Reserved.