Financial ratios from your balance sheet.

Financial ratios as discussed earlier are very useful in finding the financial strength and weaknesses of an individual. I must say that these ratios are your guidelines. After calculating your financial ratio, I hope you will get a better idea of what your financial strength and weaknesses are.

Basic Liquidity ratio is to compute the extent your liquid assets can meet your monthly expenses. A ratio of 3- 6 means that you have enough liquid assets to cover for three months of expense. How you get this ratio is just simply by dividing your cash/ cash equivalent and monthly expense.

Liquid- Asset- to- Net- Worth ratio indicates the proportion of an individual net worth that is backed by liquid asset. This ratio works as a useful supplement to the basic liquidity ratio. Just by dividing cash/cash equivalent and net worth. This ratio shows the extent of price risk that you are taking. It is prudent to have at least 15% of individual’s net worth in cash/cash equivalent.

Saving ratio is useful to determine the proportion of your income that is available after all expenses are met. By dividing savings with gross income, you can get your savings ratio. Recommended comfort zone is 10%.

In order to find out how much assets are financed through debt, we shall use the debt-to- asset ratio. This ratio is important because using too much debt to finance assets increases the risk of solvency, especially when there is insufficient cash to make interest payments and principal repayments. Ratio of more than 50% is considered too risky. Divide total debt and total asset.

Non- mortgage debt service ratio is similar to the debt- to asset ratio except it excludes all mortgage repayments from the numerator. A ratio of less than 0.15 is recommended.

To calculate your net worth that is represented by invested asset, we shall use the total investment- to net worth ratio. Just divide total invested asset by net worth. In cases where market conditions are not favorable, you may keep more of the invested asset in cash. This ratio is also to provide feedback on success of your financial plan over the years. A ratio of 50% or more is desirable when you approach your retirement.