* Short-term solvency- Liquidity Ratios: To meet its commitments, business needs liquid funds. The ability of the business to pay the amount due to stakeholders as and when it is due is known as liquidity, and the ratios calculated to measure it are known as ‘Liquidity Ratios’. These are essentially short-term in nature.Quick Ratio = Quick Assets /Current Liabilities
The Quick Ratio measures a company's ability to meet its short-term liabilities using its most liquid assets, excluding inventory. It provides a more stringent measure of liquidity compared to the Current Ratio.
* Long-term solvency- Solvency Ratios: Solvency of business is determined by its ability to meet its contractual obligations towards stakeholders, particularly towards external stakeholders, and the ratios calculated to measure solvency position are known as ‘Solvency Ratios’. These are essentially long-term in nature. Debt-Equity Ratio = Long-term Debts / Shareholders’ Funds
The Debt-Equity Ratio measures the proportion of a company's financing that comes from long-term debt relative to shareholders' equity. It is an indication of the company's financial leverage or how much it relies on debt financing versus equity financing.
* Efficiency ratios- Activity (or Turnover) Ratios: This refers to the ratios that are calculated for measuring the efficiency of operations of business based on effective utilisation of resources. Hence, these are also known as ‘Efficiency Ratios’. |
