2. 2
1
• Solvency Ratios: Introduction
2
• Equity Ratio
3
• Debt-paying Assets Ability Ratio
4
• Debt-paying Equity Ability Ratio (D/E)
5 • Interest Cover Ratio
Solvency Ratios
3. 3Solvency Ratios
• The solvency ratio is a key
metric used to measure an
enterprise's ability to meet its
debt obligations and is used
often by prospective business
lenders
• The solvency ratio indicates
whether a company's cash flow
is sufficient to meet its short-and
long-term liabilities
5. 5Example: Income Statement
Gross margin = net sales – cost of goods sold
= 450000 – 127000 = 323000
Net operating income = gross margin –
operating expenses
= 323000 – 249000 = 74000
Net income before taxes = net operating
income – interest expense
= 74000 – 8000 = 66000
Net income = net income before taxes – less
income taxes
= 66000 – 19800 = 46200
7. 7
• shows how much of the company's assets are funded by equity shares
• It also shows how much shareholders would receive in the event of a
company-wide liquidation.
Equity Ratio =
Stockholders’ Equity
Total Assets
Equity Ratio =
$ 234390
$ 346390
= %67.70
The lower the ratio result, the more debt a company has used to pay for
its assets, the closer a firm's ratio result is to 100%, the more assets it has
financed with equity instead of taking on debt.
1- Equity Ratio
8. 8
This ratio reveals how much a
company depends on debt and
how financially stable it may be in
the long run
1- Equity Ratio (cont.)
9. 9
Debt/Assets Ratio =
Total Liabilities
Total Assets
Debt/Assets Ratio =
$ 112000
$ 346390
= % 32.33
2- Debt-paying Assets Ability Ratio
This ratio indicates that how much the assets are financed by creditors
• For a firm being financially sustainable means being able to carry its debt
• Greateramount of company’s debt means greater financial risk of its bankruptcy
10. 10
how much of a company's
assets are funded by issuing
stock rather than borrowing
money
This ratio indicates that
how much the assets are
financed by creditors
2- Debt-paying
Assets Ability Ratio
1- Equity Ratio
Stockholders’Equity
Total Assets
Total Liabilities
Total Assets
11. 11
3- Debt-paying Equity Ability Ratio (D/E)
Debt/Equity Ratio =
Total Liabilities
Common Stockholders’ Equity
Debt/Equity Ratio =
$ 112000
$ 234390
= % 48
The debt-to-equity (D/E) ratio is calculated by dividing a company’s total liabilities by
its shareholder equity
12. 12
3- Debt-paying Equity Ability Ratio (D/E) (cont.)
Debt/Equity Ratio =
Total Liabilities
Common Stockholders’ Equity
Debt/Equity Ratio =
Debt-paying Assets Ability Ratio (Ratio - 2)
Equity Ratio (Ratio – 1 )
Debt/Equity Ratio =
T. Liabilities
T. Assets
T. Assets
Stock Equity×
13. 13
3- Debt-paying Equity Ability Ratio (D/E)
• The ratio is used to evaluate a
company's financial leverage
• The D/E ratio is an important metric
used in corporate finance
• It is a measure of the degree to
which a company is financing its
operations through debt versus
wholly-owned funds
• It reflects the ability of shareholder
equity to cover all outstanding debts
in the event of a business downturn
14. 14
4- Interest Cover Ratio
Interest Cover Ratio =
Earning before Interest and Taxes (EBIT)
interest
Interest Cover Ratio =
$ 84000
$ 7300
= 11.51 𝑡𝑖𝑚𝑒𝑠
The interest coverage ratio is a debt ratio and profitability ratio used to determine
how easily a company can pay interest on its outstanding debt
The Interest coverage ratio is also called “times interest earned”
Lenders, investors, and creditors often use this formula to determine a company's
riskiness relative to its current debt or for future borrowing