Essential Numerical Relations

What relations or indexes are used to determine if a certain company with its securities is in an asset situation?
To determine this, we shall use the solvency and treasury indexes. The solvency index is the quotient that results from dividing the current asset by the current liabilities. Current assets are those asset items that can be converted into cash money in a lapse of a year or less; while the current liabilities contains those liability demanded items that are within a one-year period.

The solvency ratio is in essence, a measure of the capacity of payment of a company and must be compared not only by the Treasury that this company might have had, but also of the ruling guidelines of the sector in which it operates.

An index of 2 may be considered as normal, so much for the companies as for the sectors. An index of 5 or more may be an evident sign that the company in question is in an asset situation.

The higher the solvency index, more attractive is the company to the eyes of other companies and for the individual investors that are trying to make a purchase.

The solvency index would be estimated as follows:

Solvency index  = current assets  = Normal: 2

Current liabilities
Another test that is done to prove if a company is in an asset situation is the Treasury Index. This index represents an even more strict measure of the payment capacity. It is estimated by adding the items of cash money, equivalent funds (for example, negotiable securities on the market) and clients and by dividing the results by the current liability. The Treasury index can also be obtained by subtracting from the current asset the stock and by dividing the results by the current liability.

Treasury Index = cash money + equivalent funds + clients = Normal: 1
Current liability

Or which is the same:

Current asset – stock  = Normal:  1   
Current liability

Observe that when you calculate this index the stock is excluded from the asset, this is due because stock is the least liquid of the assets and the one who is in better condition for management manipulations.

An Index 1 is considered as acceptable for most of the companies with the condition that the annual comparison of their securities indicates a positive tendency.

The calculation of the Treasury Index puts in evidence those companies that have an asset situation. For the professional analyst or for the specialist in fusion and acquisitions a high Treasury index is a sign that they have to proceed with a more thorough examination. This is why this index serves the professional analysts as a filter to quickly identify those companies to which they have to dedicate more time and efforts.

Beginner Money Investing Fundamental Analysis Analysis of the Current Asset Assets or value situations; What is an asset situation? Essential Numerical Relations Fundamental Analysis and Technical Analysis The Importance of Analysis Stocks and Clients Analysis of the non-current assets and of hidden assets The Management of the Company Shareholders