Liquidity and solvency ratios are used to assess the capacity of a business to meet its short term liabilities using liquid assets.
For instance cash, inventory, debtors.
A company's ability to convert liquid assets into cash to cover debts is of the utmost importance when creditors are seeking payment.
Some examples of liquidity / solvency ratios are:
|
Current ratio |
Current assets (expressed in $)
/
Current liabilities (expressed in $) |
An indicator of whether the business has enough short-term assets to cover its short-term debt |
|
Quick ratio |
Current assets less inventory (expressed in $)
/
Current liabilities (expressed in $) |
Similar to the current ratio, although more conservative as it excludes inventory from current assets |
|
Debt to equity ratio |
Net debt (expressed in $)
/
Equity (expressed in $) |
A measure of how the business is funded. The higher the ratio, the more the business is relying on debt financing |
|
Interest cover |
Operating profit (expressed
in $)
/
Interest expense (expressed
in $) |
A key ratio for financiers. Measures how comfortably the business is covering its interest costs |