solvency ratio

Examples of solvency ratio in the following topics:

• Selected Financial Ratios and Analyses

  • Ratios can identify various financial attributes of a company, such as solvency and liquidity, profitability (quality of income), and return on equity.
  • A publicly traded company's stock price can also be a variable used in the computation of certain ratios, such as the price/earnings ratio.
  • This ratio indicates the proportion of income that has been realized in cash.
  • As with quality of sales, high levels for this ratio are desirable.
  • However, it is important to note that determination of a company's solvency is based on various factors and not just the value of the current ratio.

• Debt Utilization Ratios

  • In this case, it has a debt ratio of 200%.
  • Debt utilization ratios provide a comprehensive picture of the company's solvency or long-term financial health.
  • The debt ratio is a financial ratio that indicates the percentage of a company's assets that are provided via debt.
  • The debt service coverage ratio (DSCR), also known as debt coverage ratio (DCR), is the ratio of cash available for debt servicing to interest, principal, and lease payments.
  • A similar debt utilization ratio is the times interest earned (TIE), or interest coverage ratio.

• Using Financial Statements to Understand a Business

  • In these instances financial ratios are calculated on the reported numbers without thorough examination and questioning, though some adjustments might be made.
  • Two types of ratio analysis are analysis of risk and analysis of profitability:
  • Risk analysis consists of liquidity and solvency analysis.
  • One technique used to analyze illiquidity risk is to focus on ratios such as the current ratio and interest coverage.
  • Solvency analysis aims at determining whether the firm is financed in such a way that it will be able to recover from a loss or a period of losses.

• Balance Sheet Analysis

  • Financial ratio analysis should be based on regrouped and adjusted financial statements.
  • Two types of ratio analysis are performed: 3.1) Analysis of risk and 3.2) analysis of profitability:
  • Risk analysis consists of liquidity and solvency analysis.
  • A usual technique to analyze illiquidity risk is to focus on ratios such as the current ratio and interest coverage.
  • Solvency analysis aims at analyzing whether the firm is financed so that it is able to recover from a losses or a period of losses.

• Comparisons Within an Industry

  • Ratios of risk such as the current ratio, the interest coverage, and the equity percentage have no theoretical benchmarks.
  • The main purpose of conducting financial analysis is to measure a business's profitability and solvency.
  • Ratios must be compared with other firms in the same industry to see if they are in line .
  • Ratio analyses can be used to compare between companies within the same industry.
  • For example, comparing the ratios of BP and Exxon Mobil would be appropriate, whereas comparing the ratios of BP and General Mills would be inappropriate.

• Comparing Statement of Cash Flows with the Income Statement

  • While the income statement focuses on a firm's profitability, the statement of cash flows focuses on a firm's solvency.
  • When trying to determine the profitability and solvency of a business, it is important to analyze both of these statements.
  • However, while the income statement focuses on profitability, the statement of cash flows focuses on solvency.
  • provide information on a firm's liquidity and solvency and its ability to change cash flows in future circumstances,

• Total Debt to Total Assets

  • The debt ratio is expressed as Total debt / Total assets.
  • Financial ratios are categorized according to the financial aspect of the business which the ratio measures.
  • Debt ratios measure the firm's ability to repay long-term debt.
  • The higher the ratio, the greater risk will be associated with the firm's operation.
  • Like all financial ratios, a company's debt ratio should be compared with their industry average or other competing firms.

• Ratio Analysis and EPS

  • Financial ratios are categorized according to the financial aspect of the business which the ratio measures .
  • Acid-test ratio (Quick ratio): (Current assets - Inventory - Prepayments) / Current liabilities
  • Times interest earned ratio (Interest Coverage Ratio): EBIT / Annual interest expense
  • Return on assets (ROA ratio or Du Pont Ratio): Net income / Average total assets
  • Ratio analysis includes profitability ratios, activity (efficiency) ratios, debt ratios, liquidity ratios and market (value) ratios

• Using the Receivables Turnover Ratio

  • The receivables turnover ratio measures how efficiently a firm uses its assets.
  • The receivables turnover ratio, also called the debtor's turnover ratio, is an accounting measure used to measure how effective a company is in extending credit as well as collecting debts.
  • The receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets.
  • A high ratio implies either that a company operates on a cash basis or that its extension of credit and collection of accounts receivable is efficient; in contrast, a low ratio implies the company is not making the timely collection of credit.
  • Sometimes the receivables turnover ratio is expressed as the "days' sales in receivables":

• Acid Test Ratio

  • The acid-test ratio, also known as the quick ratio, measures the ability of a company to use its near cash or quick assets to immediately extinguish or retire its current liabilities.
  • The acid-test ratio, like other financial ratios, is a test of viability for business entities but does not give a complete picture of a company's health.
  • Generally, the acid test ratio should be 1:1 or higher; however, this varies widely by industry.
  • A low acid-test ratio may be a sign of poor use of cash by a business.
  • The acid-test ratio is similar to the current ratio except the value of inventory is omitted from the calculation.