7 Ratios which will tell your current Financial Health

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1. Liquidity Ratio

• It represents an individual’s ability to meet committed expenses when faced with an emergency.

• Liquidity Ratio = Cash or cash equivalents

Monthly committed expenses

• While some of the financial planners define the liquidity ratio as a ratio between liquid assets and net worth, the basic liquidity ratio mentioned above is used in terms of analyzing the existing emergency fund.

• It is a prescribed practice to maintain 3-6 months of expenses as an emergency fund, which denotes that the ideal levels of liquidity ratio ranges from 3 to 6.

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2. Asset to Debt Ratio

• It compares the assets accumulated by an individual against the existing liabilities.

• Asset to Debt Ratio = Total Asset

Total Liabilities

• The total assets include the liquid and illiquid assets accumulated over the years. The total liabilities term includes all forms of liabilities such as home loan, car loan, outstanding credit card balance etc.

• The ideal ratio varies based on the situation of the person. For a middle income in early thirties who has just bought a new home, this ratio is recorded lower. Similarly, for a person in his peak earning phase this ratio is recorded higher. This ratio stands as relative measure which helps in analyzing what you own vs. what you owe.

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3. Current Ratio

• This ratio represents the ability of an individual to service the short term liabilities in case of any financial emergency.

• Current ratio = Cash or Cash equivalents

Short term liabilities

• The assets such as cash in hand, cash in bank and other such assets which can be liquidated immediately are considered as cash or cash equivalent component. The short term liabilities include all the debt repayments that are to be made in the current year.

• The total EMI payments that are to be made in the current year, credit card outstanding balance and other such obligations, which are to be met in the current year, are considered when calculating short term liabilities.

To read complete article click: 7 Ratios which will tell your current Financial Health

4. Debt Service Ratio

• Debt Service Ratio represents whether the EMI payments being made are at a comfortable level or not.

• Debt Service Ratio = Short term liabilities

Total income

• This ratio indicates the percentage of income being accounted for debt repayment and similarly the percentage of income left over for other mandatory household expenses and savings.

• Lower the ratio, better the debt management state of an individual.

To read complete article click: 7 Ratios which will tell your current Financial Health

5. Saving Ratio

• This is one of the most common and simpler financial ratio. It compares the monthly surplus being generated against the total cash inflows.

• Saving Ratio = Monthly surplus

Monthly income

• Though the ratio looks familiar and simple, it gives us the insights about how well our finances are being managed.

• It also represents our ability to achieve our future goals. Higher ratio means better money management skills.

To read complete article click: 7 Ratios which will tell your current Financial Health

6. Solvency Ratio

• Solvency ratio compares the net worth of an individual against total assets accumulated.

• Solvency Ratio = Net worth

Total Assets

• Net worth of an individual is the difference between his total assets and total liabilities. If the assets accumulated are worth more than the liabilities one owes, net worth is positive.

• This ratio indicates the ability of an individual to repay all the existing debts using existing assets in case of unforeseen events.

To read complete article click: 7 Ratios which will tell your current Financial Health

7. Investment Assets to Total Assets • This ratio compares the liquid assets being held by an

individual against the total assets accumulated.

• Investment assets to Total Assets = Liquid Assets

Total Assets

• Investments in stocks, mutual funds or other such investments which can be converted to cash easily are considered as liquid assets.

• Apart from the liquid assets, total assets also include illiquid assets such as real estate or other such investments which require more time to convert to cash.

• One should at least hold 20% of the total assets in the form of liquid assets.

To read complete article click: 7 Ratios which will tell your current Financial Health

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