Financial Statement Ratio Analysis |
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Personal financial statement ratio analysis is a guide to evaluate the financial position of an individual based on series of financial formulas. It is important to know your financial health prior to start developing your life plans. By doing a thorough financial statement ratio analysis, you will have a clear idea of whether to carry on with your planning. For example, you may want to put your investment on hold, if you have identified yourself of having liquidity problems after going through the ratio analysis.
Here are some important financial ratios which is useful to an individual.
Basic Liquidity Ratio
cash / cash equivalent Basic Liquidity Ratio = ----------------------- monthly expenses
Basic Liquidity Ratio can be derived by using cash (cash equivalents) divided by your monthly expenses. To put yourself to a healthy liquidity position, you need to achieve the ratio of between 3 to 6 months. If you are less than 3 months, then you will need to top up your cash or cash equivalent. On the other hand, if your ratio is > 6 months, then you can put the exceeding amount to an investment vehicle which may potentially bring you higher in return.
Standby Liquidity Ratio
liquid investment assets Standby Liquidity Ratio = -------------------------- monthly expenses
Standby Liquidity Ratio shows how many months can you support your living expenses when you are trapped in a serious financial crisis until all your cash or cash equivalents are fully depleted. In this critical situation, you may have to convert some of the investment assets which are more liquid into cash. Liquid investment assets include mutual fund, managed funds, fixed income securities and quoted shares. There is no specific standard for this ratio. The higher indicates the stronger your financial position.
Savings Ratio
savings Savings Ratio = ---------------- gross income
Savings Ratio is the percentage of how much have you put aside every month with the purpose of future consumption. The standard for this ratio is 10%. If this standard is not met, then you have to find ways to reduce your expenses.
Liquid Assets to Net Worth Ratio
cash / cash equivalents Liquid Assets to Net Worth Ratio = ------------------------- net worth
Liquid Assets to Net Worth Ratio is the percentage of cash or cash equivalents in your net worth. The recommended level of this ratio is not less than 15%. The higher means the more liquid is your net worth. If the level of this ratio is lower than the recommended, you may have to see if part of your investment assets can be turned into cash or cash equivalents.
Debt to Asset Ratio
total debts Debt to Asset Ratio = ------------- total assets
Debt to Asset Ratio provides information of your ability to pay debts with your available assets. As all liabilities must eventually be settled, this is a broader measure of your liquidity position, and provides a view of your solvency. This ratio has got to be 50% or lower to make sure you are in a healthy debts payment position.
Debt Service Ratio
total monthly loan repayments Debt Service Ratio = ------------------------------- monthly take home income
Debt Service Ratio shows the percentage of your monthly payment to service debts compare to your take home income. The benchmark is 35% or lower.
Non-Mortgage Debt Service Ratio
total annual non-mortgage loan repayments Non-Mortgage Debt Service Ratio = --------------------------------------------- total annual take home income
Non-Mortgage Debt Service Ratio compares your annual payments to service all debt (excluding mortgages) with your take home income. It provides insight into the amount of after-tax income that the client uses to service non-mortgage debts. A healthy ratio would be 15% or lower.
Net Investment Assets to Net Worth Ratio
total investment assets Net Investment Assets to Net Worth Ratio = -------------------------- net worth
Net Investment Assets to Net Worth Ratio compares the value of investment assets with net worth. The benchmark is 50% and above and it should be increased as retirement approaches.
Solvency Ratio
total net worth Solvency Ratio = ------------------- total assets
Solvency Ratio is to show the extent you are exposed to insolvency. It helps determine the asset cushion you have to protect yourself against insolvency. As long as the net worth remains positive, you are considered technically solvent. The higher the percentage, the greater the cushion is and the safer you are positioned against insolvency. |
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