Current Ratio is used to compare the current assets to current liabilities of the business. Stock turnover ratio is obtained by dividing the cost of sales by average stock. Interest Cover or Fixed Charges Cover: 1. Debtors turnover ratio can be calculated as follows: The objective of this ratio is to measure the liquidity of receivables or obtaining the average period over which receivables are uncollected. Internationally accepted current ratio is 2 :1 i.e., current assets shall be 2 times to current liabilities. (2) Short-term solvency (or) Liquidity ratios. The objective of calculating this ratio is to ascertain the proportion of long-term funds invested in fixed assets. Generally finance expenses like interest are not included under operating expenses. Net sales mean total sales minus sales returns. This ratio is meaningful to debenture-holders and lenders of long-term loans. Depending on the liquidity position of the firm, the kind of payables turnover desirable can be planned. Non Performing Assets PDF. Earnings ratios Profitable operations are necessary for insurance companies to operate as a going concern. In this ratio, total debt includes both short-term and long-term borrowings. Therefore they are also called ‘velocities’. Debt ratio is a financial ratio that is used in measuring a company’s financial leverage. Debt to equity ratio. Examples of solvency ratios are: Current ratio. The stock velocity of 73 days or 2.4 months conveys that on average every item of stock remains in the store for 73 days or 2.4 months before it is sold or used. The profit considered for computing the ratio is taken after payment of preference dividend. It shows the relationship between the cost of goods sold and the amount of average inventory. A very high current ratio also does not indicate efficiency since it means less efficient use of funds. The ratio should be low enough to provide fair return to the shareholders and other investors. Important solvency ratios include debt ratio (i.e. Thus, the use of solvency ratios should be supplemented with other information to gain a full understanding of the solvency of a business. Image Guidelines 4. The term capital employed has been interpreted in different ways by different accountants and authors. Better solvency ratios indicate a more creditworthy and financially sound company in the long-term. Debt Ratio. Another approach for measuring the liquidity of a firm’s debtors is the average collection period. This first type of accounting ratio formula is used for ascertaining the liquidity position of the company. Solvency Ratios . If the ratio is too high, it indicates that the owners are relying to an excessive extent on debt to fund the business, which can be a problem if cash flow cannot support interest payments. Ability to make maximum profit from optimum utilisation of resources by a business concern is termed as “profitability”. But if the firm does not pay off its creditors within time, it will adversely affect goodwill of the business. It is important to maintain a reasonable quantitative relationship between receivables and sales. Provision for tax is also subtracted while determining net profit. This ratio is also known as capitalisation or leverage ratio. Debtors Turnover ratio is also called as receivables turnover ratio or debtors velocity. As against this, the solvency of the firm is determined by solvency ratios, such as debt to equity ratio, interest coverage ratio, fixed asset to net worth ratio. A higher ratio will be due to the result of one or more of the following factors: (1) Increase in selling price without change in the cost of goods sold. Or stock turnover ratio or debtors velocity or bad an insurance company of … available solvency and. The number of times the receivables are rotated in a sense, it is a ratio between its current /! 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