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What is a good liquidity ratio for an insurance company?

In another blog, we have already discussed the liquidity ratio for an insurance company and how we can measure it. The liquidity ratio of a company shows the ability of a company to turn its assets into cash. This ratio is used to compare the financial performance of insurance companies and also used to determine how profitable a company is from year to year. Investors and creditors use this ratio to observe the potentiality of an insurance company before investing in it. In this blog, we will discuss a little more about the liquidity ratio and what liquidity ratio is good for an insurance company.

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What is a good liquidity ratio for an insurance company?

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  1. What is a good What is a good liquidity ratio for liquidity ratio for an insurance an insurance company? company?

  2. Inanotherblog,wehavealreadydiscussedtheliquidityratio foraninsurancecompanyandhowwecanmeasureit.The liquidityratioofacompanyshowstheabilityofacompanyto turnitsassetsintocash.Thisratioisusedtocomparethe financialperformanceofinsurancecompaniesandalsoused todeterminehowprofitableacompanyisfromyeartoyear. Investorsandcreditorsusethisratiotoobservethe potentialityofaninsurancecompanybeforeinvestinginit.In thisblog,wewilldiscussalittlemoreabouttheliquidityratio andwhatliquidityratioisgoodforaninsurancecompany. Letustakeacloserviewoftheseratiosandalsotheireffect oninsurancecompaniesonebyone.

  3. Current Ratio Current Ratio Thisratioisatypeofliquidityratiothatmeasuresthefinancial strengthofacompany.Generally,wetake2:1asanidealliquidity ratioforaninsurancecompanybutitmayvaryfromcompanyto company. Theformulaforcurrentratiois: Currentratio=CurrentAssets/CurrentLiabilityWhere, Currentassets=Stock+Debtor+Cashinbank+Receivables+ Loanandadvances Currentliability=Creditor+Short-termloan+Bankoverdraft+ Outstandingexpenses

  4. Acid Test Ratio or Quick Ratio Acid Test Ratio or Quick Ratio Thequickratioortheacidtestratioofacompanyindicatesthe short-termliquiditypositionofthecompany.Thisratioisa measureofacompany’sabilitytomeetitsshort-termobligations withitsmostliquidassets.Sinceanacidtestisaquicktestto demonstratetheinstantresultofachemical,therefore,Quickratio isalsocalledtheAcidtestratio.TheFormulafortheQuickRatio Is:QR=(CE+MS+AR)÷CL OR QR=(CA–I–PE)÷CLwhere: QR=Quickratio CE=Cash&equivalents MS=Marketablesecurities AR=Accountsreceivable CL=CurrentLiabilities CA=CurrentAssets I=Inventory PE=Prepaidexpenses

  5. Absolute Liquidity Ratio Absolute Liquidity Ratio Theabsoluteliquidityratioofacompanyshowsarelationship betweentheabsoluteliquidassetsandcurrentliabilitiesofthe company. TheformulaforAbsoluteLiquidityRatiois:AbsoluteLiquidity Ratio=AbsoluteLiquidassets÷TotalCurrentLiabilities AbsoluteLiquidassetsforacompany=cashinhand+cashat bank+marketablesecuritiestemporaryinvestments

  6. The basic Defense Ratio The basic Defense Ratio ThebasicDefenseRatioalsocalledtheDefensive IntervalRatio(DIR),isthemostcommonlyconsidered liquidityratio.Itindicatesthenumberofdaysan organizationcanoperatewithoutaccesstoitsnoncurrent assets.Thebasicdefenseratioissometimesviewedas thefinancialefficiencyratioofacompany.

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