19-Analysis of Solvency (1)
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Introduction of Credit Management for Overseas Trade

36 Things You Need to Know About Credit Management for Overseas Trade

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19. Analysis of Solvency (1)

Solvency analysis is also known as payment analysis. Examples are as follows. It is the most important analysis in credit management.

●Current Ratio

●Quick Ratio

●Debt to Equity Ratio

●Fixed Assets to Net Worth

 

Current Ratio

The Current Ratio is a representative indicator of safety. This index shows the ratio of current assets to current liabilities. It analyses how much of assets can be cashed out within one year for the debt due within one year.

In Japan, it is expressed as a Percentage but in overseas, it is often in Times. Either way, the higher the number, the better and the general rule is 200% or more or 2 times or more.

It is said that if this ratio falls below 70-80% or 0.7-0.8, liquidity will be low and funding will become rigid.

 

<Calculation formula>

Current Assets / Current Liabilities = Current Ratio (Times)

 

Quick Ratio

The quick ratio is an indicator that analyses the short-term solvency more strictly than the current ratio. In English, it is also called Acid Test, which is often used as a measure of liquidity.

The major difference between liquid assets and current assets is the presence of inventories. Even if the current ratio is good, companies with a low quick ratio may have a bad inventory, so should be cautious.

The higher the number, the better. The general rule is 100% or more, or 1 time or more. It is said that, if this ratio falls below 50% or 0.5, liquidity will be low and funding will become rigid.

 

<Calculation formula>

Liquid Assets / Current Liabilities = Quick Ratio (Times)

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【PDF】Introduction of Credit Management for Overseas Trade

Introduction of Credit Management for Overseas Trade

36 Things You Need to Know About Credit Management for Overseas Trade

This ebook was created as a resource for those who have trouble with diverse trading or want to learn Credit Management in a rational.

 

Chapter (Excerpt)

  • Major Differences Between International and Domestic Transactions 
  • Trade Reference
  • Bank Reference
  • Collection Agency
  • Reasons Behind Difficulty in Recovering Delayed Debts
  • Mistakes in International Transactions Where Japanese Companies are Prone to Fail
  • Customer Analysis ~ 5 C's of Credit
  • Dangerous Signs
  • Five Principles of Debt Collection