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)
