10 July 2011

Demo of PPM Part 3 - Financial Ratio Detailed Explanation

In Part 3, I would like to explain in detail on the financial ratio in the spreadsheet which can be found in here:

The item 1-2 (Current Financial Ratio)

1. Acid-Test Ratio
2. Current Ratio

Both ratios measure how long you can survive if you stop generating active income and utilizing your current asset to cover the current liabilities. Basically if
your current ratio is 10, means that you would be able to cover your current liabilities for 10 years. In another word, if your current ratio is 10 and your current investment return is 10%, then you would be able to survive in an infinity period without a need to liquidate the non current assets. 

The item 3-4 (Debt Management Ratio)

3. Total Debt to Equity Ratio
4. Long Term Debt Ratio

These are the ratio that measures how good you are in debt management. Some people will afraid of the debt as they do not how to utilize the debt to generate more income. For me, I would prefer to use debt to generate more positive cash flow so that I could have more money to purchase more cash generating assets such as Properties, Shares, or any other financial assets. However, please find out the optimal debt ratio yourself as everyone does have their comfortable level to manage their debt. The more advance level you are in, the greater ratio that you can have. However, please also do a test scenario to test out your current financial ratio so that your current financial ratio can be in a healthy ratio. 

The item 5-6 (Current Investment Asset to Total Portfolio Ratio)

5. Investment To Current Asset Ratio
6. Cash To Total Asset Ratio

Current Investment Asset to Total Portfolio Ratio shows you the ratio to manage your cash and investment portion in your portfolio. You can adjust the ratios based on the market condition and as well as to your long term target. To me, I would like to have 10% of cash in my total assets so that I would have at least 10% of cash to support me to pay the short term debts & other living expenses in short run. For Investment to Current Asset Ratio, I would like to set it for at least 50%, so that I could have 50% investment in my current assets and not to waste the opportunity cost for putting my assets in Cash.

The item 7 (Non Current Investment Asset to Total Portfolio Ratio)

7. Real Estate Investment to Total Asset Ratio

As I am currently wish to utilize the long term debt to purchase non current asset and generate more rental income, I have to maintain a certain level to my real estate investment to total asset ratio. Sometime, if the real estate investment to total asset ratio is too high, I may wish to liquidate my real estate to current assets such as stock/share or cash to rebalance my personal portfolio. 

In Part 4, I would like to illustrate in details on Current Investment Asset to Total Portfolio Ratio as this is the most important part in your personal portfolio management so that you could survive in both long term and short term. 

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