# What are the names of the major ratios useful in assessing (a) liquidity and (b) solvency?

## Question:

What are the names of the major ratios useful in assessing (a) liquidity and (b) solvency?

## Ratios:

Ratios provide various assessments of the health of the entity. Any financial or non-financial aspects of a company can be assessed through the use of ratios.

## Answer and Explanation:

Liquidity ratios assess the ability of a company to utilize current assets to service current obligations. Common liquidity ratios are working capital, the current ratio and the quick or "acid test" ratio. Working capital is the dollar amount remaining after subtracting total current assets and total current ratios. The current ratio and the quick ratio reports the number of times that current or the most liquid current assets can cover current obligations. The higher the ratios or more liquid a company is.

Solvency ratios assess a company's ability to meet its obligations. Examples of solvency ratios include interest coverage, debt to worth/equity, and debt to assets. The lower the debt to assets and debt to worth ratios the greater the solvency of an entity. The higher the interest coverage the greater the ability of a firm to service the interest on the obligations.

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from Geometry: High School

Chapter 7 / Lesson 1