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What is the difference between liquidity ratios and solvency (leverage )ratios?

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Question added by Sawsan Hajeer , Section head of financial statements and budgets , National for employment and training company
Date Posted: 2013/10/11
Nitin Gupta, ACA
by Nitin Gupta, ACA , FP&A , Rockwell Automation

To add to Mansour's comment, Leverage ratio tell us how efficiently the company is using its debt and equity while maintainiing its Liquidity ratio.

 

eg. A company with cost of capital > Rate of return should not use debt more and resultant its liquidity will always be good.

A company with Cost of Capital < Rate of return should use more of debt till the point its Liquidity is not at stake. 

Fouzan Qadeer
by Fouzan Qadeer , Corporate Financial Analyst , Balubaid Group

Solvency and liquidity are both terms that refer to an enterprise’s state of financial health, but with some notable differences. Solvency ratios refer to an enterprise's capacity to meet its long-term financial commitments. Liquidity ratios refer to an enterprise’s ability to pay short-term obligations.

Liquidity also refers to its capability to sell assets quickly to raise cash. A solvent company is one that owns more than it owes; in other words, it has a positive net worth and a manageable debt load. On the other hand, a company with adequate liquidity may have enough cash available to pay its bills, but it may be heading for financial disaster down the road. Solvency and liquidity are equally important, and healthy companies are both solvent and possess adequate liquidity. 

Mansour Al Ahmadi
by Mansour Al Ahmadi , Financial Analyst , Aramco Trading Company

The main difference is that Liquidity Ratios measures the company's ability to meet it's obligations in the SHORT-TERM period while Leverage Ratios explains the company's overall structure of debt and Equity or to meet its obligation ( Overall Obligations )

 

I hope that Answered your question.

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