Knowing your numbers: Your solvency ratios
This is a follow up to my previous blog entry on The Power Of Numbers. This time I’m dealing with what we accountants call “Solvency Ratios”. This is even more relevant today because most of us trade under the relative security of a company structure, and the legislation requires us to ensure we are “solvent”.
If not, and ignorance is no excuse, then we may no longer be protected under the corporate structure, and our personal assets may be up for grabs from hungry creditors.
There are a number of solvency ratios but they all have a common purpose – to measure business risk, specifically the risk attached to your ability to pay your debts in the absence of any cash flow. Investors are very interested in these ratios because they indicate the amount of debt your company can handle. By indicating the amount of investment equity you have in your company they tell whether it owns more than it owes. (more…)
Knowing your numbers: Your solvency ratios
