Solvency Ratios

Only available on StudyMode
  • Download(s) : 252
  • Published : September 16, 2012
Open Document
Text Preview
Solvency Ratios
Solvency ratios are used by long-term creditors and stockholders to measure a company’s debt-paying ability, particularly its ability to pay interest as it comes due and to repay the face value of debt at maturity (Weygandt, 2010). There are two types of solvency ratios that provide information about debt-paying ability; debt to total assets ratio and times interest earned (also called interest coverage). Debt to assets ratio

Formula: Divide total liabilities by total assets. The formula is: Total liabilities
Total assets
A ratio greater than 1 indicates that a considerable proportion of assets are being funded with debt, while a low ratio indicates that the bulk of asset funding is coming from equity. Riordan Industries| 2011| 2010| 2009|

Total assets| $702165| $599999| $300001|
Total liabilities| $40711| $39845| $22023|
Debt to assets ratio| 0.06:1| 0.07:1| 0.07:1|

2011 40711/702165= 0.0579792498914073 rounded up equals 0.06 201039845/599999= 0.0664084440140734 rounded up equals 0.07 2009 22023/ 300001= 0.0734097553008157 rounded up equals 0.07 Consolidated balance sheet data

Riordan Manufacturing| 2011| 2010|
Total assets| $47409137| $34825498|
Total liabilities| $13961155| $4878506|
Debt to assets ratio| 0.3:1| 0.01:1|
201113961155/47409137= 0.2944823695061144 rounded up equals 0.3 20104878506/34825498= 0.0137401050230495 rounded up equals 0.01 A ratio greater than 1 indicates that a considerable proportion of assets are being funded with debt, while a low ratio indicates that the bulk of asset funding is coming from equity.

Times interest earned
Formula :( Income before income taxes + Interest expense) divided by Interest expense
(Income before Income Taxes + Interest Expense)
Interest Expense
Unaudited Income Statement
Riordan Industries| 2011| 2010| 2009|
Income before taxes| $267725| $224659| $162011|
Interest Expense| $768| $1301...
tracking img