Your Money Ratios by Charles Farrell J.D., LL.M.: 9781583334164 | PenguinRandomHouse.com: Books (2024)

FAQs

What is the formula for financial ratio? ›

The two key financial ratios used to analyse liquidity are: Current ratio = current assets divided by current liabilities. Quick ratio = (current assets minus inventory) divided by current liabilities.

"I always recommend keeping your total debt-to-income ratio below 36%, which covers home loan payments and other debts," Hendrix said. So, if your monthly income is $5,000, your housing costs and other debts should be no more than $1,800 per month.

A ratio of 1 or greater is considered acceptable for most businesses. Indicates a company's ability to pay immediate creditor demands, using its most liquid assets.

As a general rule of thumb, your net worth should be at least 50% of your total assets. The higher the ratio, the better it is, as this means that the person has a strong financial position.

5 Essential Financial Ratios for Every Business. The common financial ratios every business should track are 1) liquidity ratios 2) leverage ratios 3)efficiency ratio 4) profitability ratios and 5) market value ratios.

Financial Ratios Definitions

If a company has $200,000 in debt and $100,000 in equity, the debt-to-equity ratio is two ($200,000 / $100,000 = 2). This means the company has $1 dollar of equity for every $2 of debt.

#1 Don't Spend More Than You Make

When your bank balance is looking healthy after payday, it's easy to overspend and not be as careful. However, there are several issues at play that result in people relying on borrowing money, racking up debt and living way beyond their means.

The 70-20-10 budget formula divides your after-tax income into three buckets: 70% for living expenses, 20% for savings and debt, and 10% for additional savings and donations. By allocating your available income into these three distinct categories, you can better manage your money on a daily basis.

The 80/20 budget is a simpler version of it. Using the 80/20 budgeting method, 80% of your income goes toward monthly expenses and spending, while the other 20% goes toward savings and investments.

The bad debt ratio measures the amount of money a company has to write off as a bad debt expense compared to its net sales. In other words, it tells you what percentage of sales profit a company loses to unpaid invoices.

How do you know if a financial ratio is good or bad? ›

The total-debt-to-total-assets ratio is used to determine how much of a company is financed by debt rather than shareholder equity. A smaller percentage is better because it means that a company carries less debt compared to its total assets. The greater the percentage of assets, the better a company's solvency.

While average ratios, as well as those considered “good” and “bad”, can vary substantially from sector to sector, a return on equity ratio of 15% to 20% is usually considered good.

Bernard Arnault, chairman of LVMH, is the richest person and the richest man in the world with a net worth of $215 billion. After Arnault is Jeff Bezos, founder of Amazon. Other billionaires with some of the largest net worths include Tesla's Musk, Microsoft's Bill Gates, and Oracle's Larry Ellison.

Ratio Formula

Here, “a” is called the first term or antecedent, and “b” is called the second term or consequent. Example: In ratio 4:9, is represented by 4/9, where 4 is antecedent and 9 is consequent.

Example: For example, if a company has an operating cash flow of $1 million and current liabilities of $250,000, you could calculate that it has an operating cash flow ratio of 4, which means it has $4 in operating cash flow for every $1 of liabilities.