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Business Finance Consultants

Financial Ratios – Solvency Ratios

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I spoke in previous blogs about the importance of Profitability Ratios, then Efficiency Ratios, then Liquidity Ratios. Finally, in this blog, I highlight the importance of Solvency Ratios.

It’s important to not confuse Solvency with Liquidity. While both set of ratios measure the financial health of a company, they have notable differences. As previously explained, the Liquidity Ratios are used to determine a company’s ability to pay off its short-term debts (12 months and less). The Solvency Ratios measure the ability for a company to meet its long-term financial obligations.

In other words, the Liquidity Ratios measure the ability to quickly convert assets into cash, while the Solvency Ratios checks that the business owns more than it owes. The latter has a longer term emphasis. Read more →

Business Finance Consulting

Financial Ratios – Liquidity Ratios

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In earlier blogs, I spoke about the importance of Profitability Ratios, then Efficiency Ratios. In this blog, I highlight the importance of Liquidity Ratios.

Liquidity ratios are used to determine a company’s ability to pay off its short-terms debts. Short term means 12 months and less.

Liquidity ratios can be of enormous benefit to business owners, Directors and Managers when developing budgets. They tend also to be of great interest to lenders, Creditors, potential investors and prospective Managers and Directors when making decisions as to whether or not to join a company.

Common liquidity ratios include the Working Capital Ratio, the Current Ratio, the Quick Ratio and the Operating Cash Flow Ratio. Read more →