Question

What ratios are involved in analyzing short-term liquidity risk and long-term solvency risk?

Answer 1

Ratios which are involved in analysing short-term liquidity risk are as follows-

A. Current ratio-this will be reflecting ratio of current asset to the current liabilities and the higher the ratio the better it is for the company because it would be helpful for the company in order to pay its interest related to debt payments

B. Debt service coverage ratio will also be important because it would be reflecting the capability of company in payment of its interest cost

C. quick ratios are also important in order to determine the ability of the company in order to pay off its debt because it will be reflecting the cash in the cash equivalent position of the company.

Ratios which are involved in long term solvency risk are as follows-

A.debt equity ratio is used to find the proportion of debt to the overall equity and a higher debt equity will always be seen as a warning signal for the company in the long term in terms of solvency

B. Degree of financial leverage is another important ratio in determination of the overall solvency risk associated with a company because it will reflect the overall financial leverage and it should be impacting the solvency of the company in the long run.

these ratios can be used by the company in order to find out liquidity as well as solvency in the short as well as in the long run.