Ratio of Loss to Liquidation

Purpose

The LL ratio is meant to give a broad picture of the health of a firm that has declared bankruptcy. More specifically, it provides a measure of the health of those who owe money to the firm that has so declared. The LL ratio is really about the chances of receiving monies owed to the firm during the time that the bankrupted company has to get its affairs in order. It can be figured monthly or quarterly, depending on the time window of the bankruptcy proceeding itself.

The main receivable variable used in the formula is the "written off" portion. In all bankruptcy proceedings, the court and its representatives on the bankruptcy committee realize that getting all outstanding bills owed to the firm is very difficult, especially when those people who owe money realize that the firm to which they owe will soon be liquidated. Therefore, the court and creditors will "write off" certain receivables as noncollectable. This figure also includes all persons or other firms that have themselves declared bankruptcy and hence, cannot be forced to pay. The total losses of those receivables that cannot be realized are divided by the money actually collected during the time under review. Therefore, the calculation in this version is easy -- it is the total losses divided by the total realized receivables. This percentage is the loss-to-liquidation ratio.

There is another, more complex, version of the LL figure spelled out by economist Waymond Grier in his book "Credit Analysis of Financial Institutions." His version has four variables. The first figure is derived from dividing the total received money into all cash losses. This figure is then multiplied by the division of liquidated assets into net losses, that is, losses as against any realized gains. This is also a percentage that can be used to measure the health of the firm. This formula does not just deal with receivables, but total assets and total income against total losses.

The difference between the two formulas is simple comprehensiveness. The first deals largely with receivables as the main asset, while the second deals with total assets. The second, more complex, measure is a more static picture dealing with assets as a whole, while the first deals with money that might be realized by creditors in the future.