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:
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 |