RATIOS FOR EVALUATING FINANCIAL PROGRESS Financial ratlos provide guidelines for measuring the changes in your financial situation. These relationships can Indicate progress toward an Improved financial position. Ratio Debt ratio Calculation Liabilities divided by net worth Liquid assets divided by current liabilities Current ratio Liquidity ratio Liquid assets divided by monthly expenses Example Interpretation $25,000/$50,000 = 0.5 Shows relationship between debt and net worth; a low debt ratio is best. $4,000/$2,000 - 2 Indicates $2 In liquid assets for every $1 of current liabilities; a high current ratio is desirable to have cash avail- able to pay bills. $10,000/$4,000 = 2.5 Indicates the number of months in which living expenses can be paid if an emergency arises; a high liquidity ratio is desirable. $540/$3,600 = 0.15 Indicates how much of a person's earnings goes for debt payments (excluding a home mortgage); most financial advisers recommend a debt/payments ratio of less than 20 percent $648/$5,400 = 0.12 Financial experts recommend monthly savings of 5-10 percent. Debt-payments Monthly credit ratio payments divided by take-home pay Savings ratio Amount saved each month divided by gross Income Based on the following Information, calculate the ratios requested: Llabilities $12,000 Net worth $36,000 Liquid assets $2,200 Current liabilities $550 Monthly credit payments $150 Take-home pay $900 Monthly savings $130 Gross Income $1,500 1. Debt ratio 3. Debt-payments ratlo 2. Current ratio 4. Savings ratio Analysis: How do these ratlos compare with the guidelines mentioned in the "Interpretation" column above