Archive / Investment Adviser (Level 1) / Introduction to Personal Financial Planning

nism-series-xa-solvency-ratio-calculation-financial-planning[ INVESTMENT ADVISER (LEVEL 1) ]

A family balance sheet reports Total Assets of ₹1,50,00,000 (Residential Home ₹90L, Mutual Funds ₹40L, Cash/Deposits ₹20L) and Total Liabilities of ₹45,00,000 (Home Loan ₹40L, Car Loan ₹5L). What is their Solvency Ratio?

[ A ]30.0% (Debt-to-Asset Leverage Ratio: ₹45L / ₹1.5 Cr)

[ B ]70.0% [ (Net Worth / Total Assets) * 100: (₹1,05,00,000 / ₹1,50,00,000) * 100 ][ CORRECT ]

[ C ]50.0%

[ D ]100.0%

Takeaway

Option B is correct: 70.0% [ (Net Worth / Total Assets) * 100: (₹1,05,00,000 / ₹1,50,00,000) * 100 ]

Derivation

Net Worth = Total Assets − Total Liabilities = ₹1,50,00,000 − ₹45,00,000 = ₹1,05,00,000. Solvency Ratio = (Net Worth / Total Assets) × 100 = (₹1,05,00,000 / ₹1,50,00,000) × 100 = 70.0%. This figure tells you what fraction of the family's asset base is genuinely owned outright, unencumbered by any lender's claim. A commonly cited planning benchmark treats a solvency ratio above roughly 50% as a healthy cushion against insolvency in a downturn, and 70.0% here comfortably clears that. Candidates sometimes confuse this with the inverse metric, the Leverage Ratio, which measures liabilities as a share of assets rather than net worth.

Why the others fail

A — 30.0% (Debt-to-Asset Leverage Ratio: ₹45L / ₹1.5 Cr)

Calculates the Leverage Ratio (Liabilities / Assets = 30.0%), which measures indebtedness rather than the Solvency Ratio, which measures Net Worth against Total Assets.

C — 50.0%

Does not correspond to the actual Net Worth-to-Assets calculation of 70.0% derived from the balance sheet figures given; it appears to be a rounded guess.

D — 100.0%

Assumes the household carries zero liabilities, which contradicts the ₹45,00,000 in Home Loan and Car Loan debt stated in the balance sheet.