8 Personal Financial Ratios

Question 1

What is the formula for calculating the Liquidity Ratio?

Answer 1

Liquid Assets ÷ Monthly Expenses

The Liquidity Ratio measures the ability to cover monthly expenses with liquid assets.

Question 2

How do you calculate the Assets-to-Debt Ratio?

Answer 2

Total Assets ÷ Total Debt

This ratio assesses the proportion of assets financed by debt.

Question 3

What is the formula for the Debt-to-Income Ratio?

Answer 3

Annual Debt Payments ÷ Annual Gross Income

This ratio indicates the percentage of income that goes toward debt payments.

Question 4

How is the Debt Payments-to-Disposable Income Ratio calculated?

Answer 4

Monthly Nonmortgage Payments ÷ Monthly Disposable Income

This ratio shows the proportion of disposable income used for nonmortgage debt payments.

Question 5

What formula represents the Solvency Ratio?

Answer 5

Total Net Worth ÷ Total Assets

The Solvency Ratio evaluates financial stability by comparing net worth to total assets.

Question 6

What are financial ratios?

Answer 6

Calculations designed to simplify evaluation of financial strength and progress.

Financial ratios are essential tools for analyzing financial performance.