Solvency Flashcards
Solvency tells us
The ability to meet debt obligations on an ongoing basis
Measures a firm’s actual cash flow
Assesses the long-term health
High solvency is an indication of stability
D/E ratio tells us
For ever $ in equity, how much $ in debt
Financial strength of the company
D/E is very high
Companys operations are mostly funded by debt
Everything the company has, is owned by someone else
D/E is low
Company’s operations are mostly financed by shareholders
D/E formula
Non-current & current borrowings / equity
LTL + CL / OF
Equity ratio tells us
The proportion of a company’s total assets that was funded by capital of shareholders
The higher the ratio, the less credit risk there is for the company, as the company does not rely much on creditors
Low equity ratio
Indicator of financial risk, since creditors are mostly used to finance assets
High equity ratio
Effective funding of assets with a minimal amount of debt
Equity ratio formula
(Total equity / TA) * 100%
(OF/ (OF+LTL+CL)) * 100%
Debt ratio tells us
Proportion of assets funded by debt
High debt ratio means a company is highly leveraged
Debt ratio < 1
More assets than debts
Debt ratio > 1
More debts than assets
Debt ratio formula
Total liabilities/TA*100%
Total debt/TA *100%
Interest cover ratio tells us
Ability to pay interest on its debt, how easy interest can be paid
High interest cover ratio
Greater solvency
Low interest cover ratio
Low (= < 1.5) more burdend debt expenses, less capital to use
Interest cover ratio formula
EBIT/interest
Operating profit/net finance expenses
DSCR tells us
Ability to pay interest and redemption from operating profit
DSCR formula
Net profit + interest expenses + depreciation / interest + principal payment + repayment financial liabilities
Non-profit: EBITDA/interest + redemption
Solvent is when
a company’s assets are sufficient to meet its liabilities
(Considered solvent when current assets > current liabilities)
Highly leveraged means
An item has more debt than equity
