Financial ratios reference: solvency, liquidity groups (A1–P4), stability and profitability

This page is a reference: each ratio takes one row of a table, with the formula given in words and by balance sheet line codes. No new company was invented for the example: the figures come from the «Bo'stonliq Suv» LLC case («There is a profit, yet cash has halved», link at the bottom of the page). The company's story, the structure of assets and liabilities, the turnover indicators and the recommendations for the manager are described there and are not repeated here. This page adds three new things to the case: reading solvency step by step, testing balance sheet liquidity by groups A1–A4 and P1–P4, and the stability and profitability ratios that the case did not cover.

Assumptions: amounts are in thousand soum; the company and the figures are hypothetical and compiled by the author. The three-digit numbers in brackets and in formulas are line codes of Appendix 1 (balance sheet) and Appendix 2 (statement of financial results) to the Regulation approved by Order No. 181. Balance sheet indicators are calculated separately for the start and the end of the year; for profitability, the net profit for the year is divided by the average balance: (start of year + end of year) ÷ 2. Ratios are rounded to two decimal places.

Terms: solvency, liquidity and balance sheet liquidity

The same formula appears under different names in different textbooks. So let us separate the terms first:

• Asset liquidity: how quickly and without loss of value an asset can be turned into cash. Cash in the bank account is the most liquid asset; buildings and equipment are among the least liquid.
• Balance sheet liquidity: when assets are grouped by how fast they turn into cash and obligations by when they fall due, does each asset group cover the matching liability group? The A1–P4 tables below are about this.
• Solvency (in the sense used in CIS textbooks): a company's ability to pay its obligations on time. The ratios that many textbooks call the absolute, intermediate and overall solvency ratios are called the cash ratio (absolute liquidity), the quick ratio and the current ratio in other sources: the numerator and denominator are the same, only the name differs.
• English-language literature: "liquidity ratios" usually mean the ability to pay short-term debts (cash ratio, quick ratio, current ratio), while "solvency ratios" more often refer to ratios tied to long-term obligations and the debt burden. Do not automatically equate "solvency ratios" in an English source with the solvency ratios of CIS textbooks: look at the formula first.

Table 1. Solvency ratios: formulas

The numerator of the overall ratio is often taken as all current assets (390); then it also includes prepaid expenses of future periods (190), deferred expenses (200) and other current assets (380). At «Bo'stonliq Suv» short-term investments and these three lines are zero, so both versions give the same result. Whichever version you choose, apply it every year.

Table 2. «Bo'stonliq Suv»: the solvency ladder

All three ratios match the liquidity table in the case, because the company's current assets consist only of inventories, receivables and cash. The interpretation of each is given in the case. Here we look at something else: the difference between the steps.

The overall ratio is the sum of the three steps: at the end of the year 0.08 + 0.62 + 0.54 = 1.24, at the start 0.16 + 0.42 + 0.39 = 0.97. The growth over the year (+0.27) came entirely from the second and third steps: receivables +0.20, inventories +0.15, while cash moved −0.08. So the conclusion "coverage of current debts improved" rests not on cash but on expected receipts and the warehouse.

Practical tip: record the ratio not as one number but as three steps. Then you can see at a glance whether the improvement is in cash or in the warehouse.

Table 3. Balance sheet liquidity: groups A1–A4 and P1–P4

Assets are split into four groups by how fast they turn into cash, and liabilities and equity by when they fall due. The groups and conditions are based on the methodological material listed in the sources; the mapping to the balance sheet lines of Order No. 181 was compiled by the author.

With this grouping, A1 + A2 + A3 equals current assets (390), and P1 + P2 equals current liabilities (600). For the balance sheet to be considered absolutely liquid, four conditions must hold at the same time: A1 ≥ P1, A2 ≥ P2, A3 ≥ P3 and A4 ≤ P4.

One useful observation about the fourth condition. Total assets equal total liabilities and equity (400 = 780), so A1 + A2 + A3 + A4 = P1 + P2 + P3 + P4. Therefore, if the first three conditions hold, A4 ≤ P4 holds automatically. The reverse is not true: meeting A4 ≤ P4 does not guarantee the first three.

Table 4. «Bo'stonliq Suv»: comparing the groups

Difference = asset group − liability group.

How the groups were built: P1 at the start of the year is 420 000 + 42 000 + 54 000 = 516 000, at the end 444 000 + 48 000 + 60 000 = 552 000 (payables to suppliers 610, payables to the budget 680, wages payable 720). P2 at the start is 96 000 + 120 000 = 216 000, at the end 48 000 + 120 000 = 168 000 (short-term bank loans 730 and the current portion of long-term liabilities 750). The difference columns always add up to zero: −396 000 + 90 000 − 78 000 + 384 000 = 0 and −492 000 + 276 000 − 150 000 + 366 000 = 0. This is the easiest way to check the calculation.

What it means. Of the four conditions, only one is met on both dates, so the balance sheet is not absolutely liquid.

• A1 < P1: cash covers 23.26% of the most urgent debts at the start of the year and only 10.87% at the end (120 000 ÷ 516 000 and 60 000 ÷ 552 000). This is another view of the fall in absolute solvency, but the denominator holds only current payables, without bank loans.
• A2 ≥ P2: receivables exceed the short-term loan and the current portion of the loan, and the surplus grew from 90 000 to 276 000. But whether the condition is really met depends on collecting customer debts on time: most of A2 is owed by customers.
• A3 < P3: inventories are smaller than long-term liabilities. At «Bo'stonliq Suv» the reason is clear: the loan was taken not for inventories but for the bottling line, so it financed A4, not A3.
• A4 > P4: non-current assets exceed equity by 366 000. This equals the narrow version of own working capital in the case (−366 000): two views of the same calculation.

An additional check (author's calculation): to see the near-term position, compare the first two groups together. (A1 + A2) − (P1 + P2) at the start of the year is 426 000 − 732 000 = −306 000, at the end 504 000 − 720 000 = −216 000. The shortfall narrowed by 90 000 but is still negative: current debts cannot be paid without selling inventories.

Table 5. Financial stability ratios: formulas

The balance sheet total is the same on the assets side (400) and on the liabilities side (780). The numerator of manoeuvrability sometimes uses not all long-term liabilities but only long-term bank loans and borrowings (570 + 580). At «Bo'stonliq Suv» long-term liabilities consist only of the bank loan (490 = 570), so the result does not change.

Table 6. «Bo'stonliq Suv»: stability calculation

The amount in the manoeuvrability numerator: at the start of the year 1 296 000 + 360 000 − 1 680 000 = −24 000, at the end 1 428 000 + 540 000 − 1 794 000 = 174 000. This is the own working capital from the case; where it comes from and how it shrinks as the loan is repaid is explained in the case. The new information is this: at the start of the year nothing was left of equity for working capital, while at the end 12% of equity is working in current assets. The interpretation of autonomy and of the debt-to-equity ratio is also in the case.

The six ratios are in fact built from two amounts, equity and liabilities, so they are tightly linked (this follows from the balance sheet equation):

• autonomy + debt concentration = 1: at the end of the year 0.53 + 0.47 = 1.00;
• financial dependence = 1 ÷ autonomy;
• debt ÷ equity = financial dependence − 1: at the end of the year 1.88 − 1 = 0.88;
• equity ÷ liabilities = 1 ÷ (debt ÷ equity).

Practical takeaway: there is no need to show all six in a report. If you track autonomy and debt to equity, three of the remaining four follow from them. Manoeuvrability, however, adds separate information because it involves non-current assets and long-term debt.

Table 7. Profitability ratios

Net profit (270) for the year is 204 000. Average balances: assets (2 388 000 + 2 688 000) ÷ 2 = 2 538 000; equity (1 296 000 + 1 428 000) ÷ 2 = 1 362 000; liabilities (1 092 000 + 1 260 000) ÷ 2 = 1 176 000. Net assets at the start of the year are 2 388 000 − 1 092 000 = 1 296 000, at the end 2 688 000 − 1 260 000 = 1 428 000, on average 1 362 000.

• Net assets are taken here under a simplified definition: total assets − total liabilities. In the «Bo'stonliq Suv» balance sheet this difference equals equity (480), so the return on net assets matches ROE. Where net assets are calculated under a different procedure, the result may differ from ROE.
• The return on borrowed capital (17.35%) is not the interest rate paid on debt. It only shows the ratio of net profit to the amount of borrowed funds; liabilities also include interest-free debts: payables to suppliers, to the budget and wages payable.
• The interpretation of ROA and ROE and the three-factor breakdown of ROE are given in the case.

The three profitability ratios check each other (author's calculation). Average assets equal the sum of average equity and average liabilities, so 100 ÷ ROA = 100 ÷ ROE + 100 ÷ return on borrowed capital. In figures: 100 ÷ 14.98 = 6.68 and 100 ÷ 17.35 = 5.76; 6.68 + 5.76 = 12.44 = 100 ÷ 8.04. Meaning: for every 1 soum of net profit there are on average 12.44 soum of assets, of which 6.68 soum is equity and 5.76 soum is debt.

About numerical benchmarks

This reference gives no numerical benchmarks for the ratios. Different textbooks and methodological materials give different ranges for the same ratio; these are rough benchmarks commonly cited in practice, not mandatory norms, and they vary by industry. The A1–P4 conditions are the exception: they are not a benchmark but the method itself, with the source at the bottom of the page.

It is more useful to compare a ratio with three things: the company's own past periods, similar companies in the industry, and the terms agreed with the bank in the loan agreement (if the agreement sets ratio requirements).

Calculation procedure for your own company

1. Take two columns from the balance sheet (start of year, end of year) and copy these lines: 130, 140, 190, 200, 210, 320, 370, 380, 390, 400, 480, 490, 600, 601, 770.
2. Check: 130 + 390 = 400 and 480 + 770 = 780 = 400. If they do not match, a line was taken incorrectly.
3. Build groups A1–A4 and P1–P4 using Table 3: both totals must equal the balance sheet total.
4. Fill in the difference column: the differences must add up to zero.
5. Take net profit (270) from the statement of financial results and calculate the average balances for profitability.
6. Place the result next to last year and, for the three ratios that changed most, write down the reason in one sentence.

A ratio is not a verdict but a question: it asks "what changed?", and the answer has to be found in the balance sheet lines and primary documents.