The quick ratio shows the ratio between (cash + short-term securities + accounts receivable) with current liabilities. In other words, the balance between current assets less inventory and current debt. The quick ratio is also commonly called the acid test ratio. Inventories are not included in the calculation of this ratio because inventory is a current asset that has a low level of liquidity. The higher the result, the better the liquidity.
The solvency ratio shows the company’s ability to fulfill all of its obligations both long term and short term if the company is liquidated. So a solvable company is not necessarily illiquid, and a non-solvable company is not necessarily liquid. Companies that do not have sufficient assets to pay debts are usually referred to as unsolvable companies. There are 2 ratios used to calculate it.
Total Debt to Total Assets Ratio
This ratio is known as the debt ratio, which measures the number of funds that come from debt. This ratio shows the extent to which debt can be covered by company assets. The smaller the ratio the safer to eat (solvable). Creditors will prefer a low debt ratio.
Debt to Equity Ratio
This ratio is used to measure debt held with own capital. The company’s debt should not exceed the company’s own capital. This is so that the fixed burden incurred by the company is not high. The smaller the debt to capital, the better and safer.
Measuring the level of use of company assets or wealth to you. The trick is to look at some assets, then you determine what level of activity on the assets of a particular activity. After that, you will find out which assets are productive and which assets are less productive. So then you can decide on a larger allocation of funds for productive assets. Here is an example of an activity ratio:
Receivables Turnover Ratio
This ratio measures the effectiveness of receivables management. The higher the rotation, the more effective the management. With this ratio you can see the management of receivables and their credit policies. The formula is:
Inventory Turnover Ratio
This ratio shows the company’s liquidity in managing its suppliers. The higher the rotation, the better. That means companies sell and manage inventory quickly and well. If it is low, it means the effectiveness of inventory control is not good. How to calculate it is:
Inventory turnover ratio = Sales / Average inventory
Fixed Asset Turnover Ratio
This ratio measures the extent to which a company’s ability to generate sales with its fixed assets. The greater the rotation of the ratio, the better it is for the company. This ratio is quite important for industries that have high fixed assets. Whereas for industries with small assets such as service companies, it does not really matter. To calculate it you can use the following formula:
Total Assets Turnover Ratio
This ratio is almost the same as the fixed assets turnover ratio, the difference is the divisor used, that is the total assets. This ratio is used to calculate the effective use of total assets. The higher the turnover, the more effective the company is in utilizing total assets for its sales. The formula is
Thus the description of the financial ratios. With financial ratios, you can assess the financial health of your business more easily. To do ratio analysis, you must have complete and accurate financial statements. To be easy in making financial reports you can use the help of online accounting software such as Journals.