Understanding Solvency Ratios:
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A thread🧵
#ratioanalysis #investwithjainam #jainamblog #financialaccounting #financialliteracy #financialtips #accountingconcepts #accountingratio
1/ Solvency ratios measure a firm’s financial leverage and ability to meet its long-term obligations. It includes various debt ratios that are based on the balance sheet and coverage ratios that are based on the income statement.
2/ If these ratios are high that means the company has sufficient resources to meet their all obligations and vice versa.
Following are some of the solvency ratios:
Following are some of the solvency ratios:
3/ 1. Debt-to-capital Ratio
Debt-to-capital ratio measures of company’s financial leverage and also how much capital is funded by debt.
Debt-to-capital ratio = Total debt / Total debt + Total shareholders’ equity.
Debt-to-capital ratio measures of company’s financial leverage and also how much capital is funded by debt.
Debt-to-capital ratio = Total debt / Total debt + Total shareholders’ equity.
4/ 2. Debt-to-equity Ratio
It is a measure of the firm’s use of fixed-cost financing sources is the debt-to-equity ratio. This ratio indicates how much debt is used to run the business.
Debt-to-equity ratio = Total debt / Total shareholders’ equity
It is a measure of the firm’s use of fixed-cost financing sources is the debt-to-equity ratio. This ratio indicates how much debt is used to run the business.
Debt-to-equity ratio = Total debt / Total shareholders’ equity
5/ 3. Debt-to-assets Ratio
This ratio shows how much of the business is owned by the creditors compared with how much of the company’s assets are owned by shareholders. In another way, it is primarily used to measure a company’s ability to raise cash from new debt.
This ratio shows how much of the business is owned by the creditors compared with how much of the company’s assets are owned by shareholders. In another way, it is primarily used to measure a company’s ability to raise cash from new debt.
6/ Debt-to-assets ratio = Total debt / Total assets.
7/ 4. Debt-to-EBITDA Ratio
Debt-to-EBITDA ratio indicates how many years or how many times it would take for a company to pay back its debt before covering interest, taxes, and depreciation & amortization expenses.
Debt-to-EBITDA ratio = Total Debt / EBITDA.
Debt-to-EBITDA ratio indicates how many years or how many times it would take for a company to pay back its debt before covering interest, taxes, and depreciation & amortization expenses.
Debt-to-EBITDA ratio = Total Debt / EBITDA.
8/ 5. Interest Coverage Ratio
This ratio helps to determine the firm’s ability to repay its debt obligations. That’s how easily a company can pay interest on its outstanding debt.
Interest coverage ratio = earnings before interest and taxes/interest payments.
This ratio helps to determine the firm’s ability to repay its debt obligations. That’s how easily a company can pay interest on its outstanding debt.
Interest coverage ratio = earnings before interest and taxes/interest payments.
9/ 6. Financial Leverage Ratio
It measures the overall debt load of a company and compares it with the assets or equity. Sometimes this ratio is called an "equity or debt ratio".
Financial leverage = Average total assets / Average total equity.
It measures the overall debt load of a company and compares it with the assets or equity. Sometimes this ratio is called an "equity or debt ratio".
Financial leverage = Average total assets / Average total equity.
10/ 7. Fixed Charge Coverage Ratio
It measures a firm’s ability to pay all of its fixed charges or expenses with its income before interest and income taxes.
Fixed charge coverage ratio = Earnings before interest and taxes + Lease payments / Interest payments + Lease payments
It measures a firm’s ability to pay all of its fixed charges or expenses with its income before interest and income taxes.
Fixed charge coverage ratio = Earnings before interest and taxes + Lease payments / Interest payments + Lease payments
11/ For understanding solvency ratio in detail, read our blog blog.jainam.in
12/ We have also covered activity ratio in detail in our previous thread:
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