4 ms·
I think I'm having a slow moment... why are we more interested in the ratio of equity to liability, than the ratio of assets to liabilities? It seems to me tha
by epgui 4y ago
I think I'm having a slow moment... why are we more interested in the ratio of equity to liability, than the ratio of assets to liabilities?
It seems to me that if bad things happen, you can cover for the value of your liabilities with your assets. You could waste the entire excess equity on banana monkey NFTs and still be solvent, assuming no liquidity issues.
- ledauphin 4y agoI'm in the same boat. I got lost really early on because I don't really understand why the 'assets' appear to not have any value in this equation? Are the assets by definition illiquid?
- epgui 4y agoYep that's exactly why I'm lost.
- vpribish 4y agothe key that they seem to delight in not telling you is that the 100M debt also came with 100M in assets - you borrowed 100M cash (an asset you now have) and promise to give it back later (a liability you now also have). Apart from those offsetting 100M entries on your books, you also have 10M other assets. so you may have started with 10M - then you borrowed (and promise to repay) 100M more. there's your 1:10 (10:100) ratio.
- epgui 4y agoAh, I suppose I had not thought of the assets as volatile (I was essentially imagining cash equivalents), but that seems right. Thanks!
- Ferrotin 4y agoThat ratio tells you how much faster you make or lose money under an asset price movement. That is, if you’re 11:1 leveraged, a 0.01% increase in asset price is a 0.11% increase in your net equity.