Solvency Ratio

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  • Published : February 27, 2012
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The article I chose is Solvency Ratio Analysis and Leveraging. This article tells about how solvency and leveraging are connected. It describes several ratios used to determine how a company is doing long-term. Company’s use debt and equity to start and keep their operations running. Owners or stockholders donate equity to build and maintain their company. Leverage is used to produce income and impacts a company’s long-term solvency. No matter what the economic situation is, a company needs to be able to make their interest and principal payments. If a company is highly leveraged, they can go out of business. Debt Ratio is the most used. The equation is: Total Liabilities/ Total Assets = Debt Ratio. The numbers to figure out the Debt Ratio can be obtained from the balance sheet. This ratio indicates how much the company’s assets are funded through debt. Debt to Equity Ratio is used to find out the company’s solvency and leverage. The equation is: Total Liabilities/ Total Equity = Debt to Equity Ratio. These numbers can be obtained from the balance sheet. A higher amount indicates the company is obtaining most of their funding through creditors. A lower amount indicates a company is able to obtain outside funding. Times Interest Earned Ratio measures if a company can pay their interest payments. The equation is: Income Before Interest and Taxes/ Interest Expense = Times Interest Earned Ratio. These numbers can be gotten from the income statement. This ratio measures how many times operating income can cover interest expense. A high number indicates the ability to pay interest and a low number indicates problems in the future. I found this article to be informative. It gave good information on solvency, leverage, and ratios used to determine how a business is doing in the long-run.
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