Ratio analyses ppt

1. PRESTIGE INSTITUTE OF
MANAGEMENT
Topic:- Short-Term Solvency Ratio
Prepared by:-
S R TRIPATHI

2. What is Ratio?
• A ratio is a simple arithmetic expression or a tool
to presents the figures of financial statements of
a firm in simple form.
• “A ratio is an expression of the quantitative
relationship between two numbers.”
-Wixon and Bedford

3. Solvency Ratio
• Solvency means check the ability of a firm
to pay its liabilities on due date.
• In broader sense the analysis of solvency
ratio can be divided into two groups.
1.Long Term Solvency Ratio.
2.Short Term Solvency Ratio.

4. Long Term Solvency Ratio
• Such solvency is tested on the basis of the
ability of a concern to pay its long-term liabilities
at due time.
• The ratio is to use for this purpose are called as
‘Ratios of Financial Position’ or ‘Stability
Ratios’.
• Examples:
• Total Debt Ratio.
• Long Term Debt Ratio.

5. Short Term Solvency Ratio
• Short-term Solvency Ratios attempt to
measure the ability of a firm to meet its
short-term financial obligations when they
become due.
• In other words, these ratios seek to
determine the ability of a firm to avoid
financial distress in the short-run.
• The two most important Short-term
Solvency Ratios are the Current Ratio
and Quick Ratio.

6. Current Ratio
• Current Ratio is a most widely used ratio to
judge short term financial position or solvency
of a firm.
• This is also known as “Working Capital
Ratio.”
• The ratio is calculated as follows:

7. Quick Ratio
• The Quick Ratio test the short-term liquidity of the
firm. It compares current liabilities with liquid or
quick assets.(not with current assets)
• The quick ratio is more traditional than the current
ratio because it excludes inventories from current
assets.
• Inventories are generally take time to be
converted into cash, and if they have to be sold
quickly.
• The Quick Ratio is also known as the Acid-Test
Ratio.

8. Formula of Quick ratio
Or

9. Advantage
• Solvency ratio help the business owner
keep an eye on possible bankruptcy.
• As the Debt/Asset ratio increases, the
likelihood of bankruptcy also increases as
the firm is financed more and more with
debt as opposed to .