Before imparting any financial advice, advisors should conduct a financial health check. This research enables investors to clearly see the strengths and weaknesses of their portfolios. It is a good place to start when making important financial decisions about future investments.
1) Basic liquidity ratio: This ratio reflects an investor’s ability to meet minimum monthly expenses as well as other emergency needs. The basic liquidity ratio is calculated by dividing an investor’s liquid assets by the investor’s monthly expenses. This ratio can be used to make short-term investment decisions. Stocks, bonds, and other assets that can easily be converted into monetary amounts are referred to as “liquid assets.”
Extended basic liquidity ratio:When assets cannot be converted into cash, this ratio indicates an investor’s ability to meet emergencies. The optimum investment utilization ratio is another name for this ratio.
Benchmark: A score of less than 3 is considered negative. A ratio of 3 to 6 is considered moderate, and a ratio of 6 to 12 is considered optimal. When the extended basic liquidity benchmark falls below 10%, this is considered negative. A percentage of 10 to 25% is considered moderate, and anything above 25% is considered optimal.
2) Savings ratio: This ratio is calculated using a portion of an individual’s total income set aside for savings. This ratio is useful in determining how much money an investor can invest each month. This ratio is derived by dividing the savings amount by the net cash inflow. Net cash inflow means the total income of the investor.
Benchmark: A ratio of less than 10% is considered low. A ratio of 20% to 40% is considered medium, and anything above 40% is considered high.
3) Investment ratio: The investment ratio is the actual proportion of savings invested in liquid assets. This ratio can be used to make financial growth decisions. This ratio is calculated by dividing total savings by monthly investments.
Benchmark:A percentage less than 50% is considered negative. A percentage of 50% to 70% is considered moderate, and a percentage of more than 70% is considered optimal.
4) Debt service ratio: This is the most crucial of all ratios. This ratio is used to assess an investor’s ability to repay debt using only his total net income. Divide the annual total debt payment by the net annual income to calculate this ratio.
Benchmark: A percentage of less than 45% is considered negative. A percentage of 45 to 25 is considered moderate, and a percentage of less than 25% is considered optimal. In this ratio, the lower the ratio, the better it is.
5) Total investment ratio: This ratio is useful in determining the investor’s overall net worth. Divide total invested assets by net worth to calculate this ratio.
Benchmark: A percentage less than 30% is considered negative. It is considered moderate between 30 and 50%, and optimal above 50%.