When you are going to put a fixed deposit or any other investment, you should have a clear idea about the stability of relevant finance company and safety of your investment. It is useless to ask it from an employee of the same company as many of us do because they never tell the truth. So, how do we get to know it? Just ask few facts shown below and you will be able to evaluate by yourself without spend much time!
1. Net Assets - Simply net assets means ownership of a company. "It must be positive". Negative values indicate bankruptcy. Just ask "How much is your equity capital?". If it is a positive value, that's a good sign.
2. Earnings - Ask about the earnings of three consecutive years (better 5).
If all values are positive(profit), no problem.
If two are positive and one negative, good. (last year should be positive)
If two values are positive, but a loss in last year - Ask the reason. generally good but who knows?
If two are negative, last year is positive - Doubtful
If all are negative or two consecutive years reported losses, it's a bad sign.
3. Interest Rate - If it offers you a higher rate than recommended by Central Bank, pay your full attention. Always remember, 'high risk at high return'.
4. Rating - Ask "what is the company rating?" If it begins with letter "A", you can trust them. Remember to ask the year, which it belongs.
5. Quick Ratio & Current Ratio - These mean how many assets are there against 1 liability. (Imagine, you have to pay 1 rupee to somebody and there are two rupees in your pocket. So, the ratio is
That means you have ability to pay two similar payable values. Therefore, You can pay him the full amount because you have sufficient money. If you have only 50cents, (1:0.50) you can't pay him in full.
Quick ratio indicates the short term liquidity (availability of cash or cash equivalents. Current ratio indicates long term.
If both values(quick and current) are similar or greater than 1:2 - Bright Green Light
If Quick Ratio is 1:1 while Current Ratio is greater than 1:1 (1:2) - Green Light
If Quick Ratio is lower than 1:1 but greater than 1:0.8 while the current Ratio is greater than or similar 1:2 - Orange Light
If current Ratio Lower than 1:1 - Red Light
If Quick ratio Lower than 0.7 - Red Light
There are many other complicated methods, but those shown above can be done by anybody without any special knowledge. Please feel free to post any other simple method you know with simple explanations under this topic.