Net Worth Ratio
Net Worth Ratio, also known as Asset to Debt Ratio in personal finance is your balance sheet measuring your net wealth at a given point in time. This ratio compares the total assets you have accumulated against your existing liabilities. In simple terms, this ratio stands as a relative measure which helps in determining what you own v/s what you owe.
It is calculated as below:
NET WORTH RATIO = TOTAL ASSETS / TOTAL LIABILITIES
It indicates how many times your assets exceed your liabilities.
Total assets include both liquid and illiquid assets accumulated over years.
Total liabilities include all forms of liabilities such as home loans, car loans, outstanding credit card balances, and so on.
Example: If your total assets if Rs.1 Crore, and the sum of all the outstanding loans is Rs.50 lakhs, then the Net Worth ratio is (1 Crore/50 lakhs) 2.
Ideally, this ratio should be greater than 1 which means that your assets are of greater value than your liabilities.
If this ratio is less than 1, it means that your liabilities exceed your assets. It means that even if you sell all your assets, you would not be able to clear your debt.