It is important for every individual to create wealth in order to lead a comfortable life. But just creating wealth is not enough. Wealth needs to be preserved too. In order to preserve wealth, one needs to adopt suitable as well as efficient investment options and they are related to the financial status of the individual.
Financial ratios are tools that give a picture of the financial condition of a firm or an individual. Usually these ratios are used by companies to determine their financial standing from their balance sheets and income statements. But some of these can be used by individuals to ascertain their financial standing also.
The net worth of an individual is the first step towards understanding his financial status. Net worth refers to total assets of an individual less his total liabilities. Assets refer to cash in hand, bank balance, stocks, mutual funds etc while liabilities include home loan, car loan, personal loan, credit card debt etc.
Net worth = Total assets-total liabilities
It is thus an indicative of the total risk taking ability of an individual. An increased net worth decreased the necessity to invest in high risk instruments and thus capital preservation follows.
Liquidity ratio: As the name suggests this ratio is an indicative of the amount of liquid assets available with a person. It shows how much amount of the total net worth of an individual is composed of current assets. Greater the ratio, larger is the person's ability to meet immediate fund needs as in the case of an emergency.