Solvency and Coverage Flashcards
What are Solvency Ratios?
How likely a company is to stay in business and avoid bankruptcy or financial distress
they are considered risk measures
Debt / Equity Ratio
total liabilities / total stockholders’ equity
What is the Debt / Equity Ratio?
how much debt is a company using to finance its assets in relation to the equity the company holds
What is the general rule for Debt/Equity ratio?
the lower the better
the higher the risker
Long Term Debt / Equity Ratio
long term debt (only financial) / total stockholders’ equity
Equity Multiplier ratio
total assets / total stockholders’ equity
What does the Equity Multiplier measure?
how much of a firm’s assets are financed by its shareholders
what does a higher Equity Multiplier mean?
that a lot of your assets are financed with Liabilities
Times Interest Earned Ratio
EBIT / Interest Expense
What do Coverage Ratios measure?
how many times interest expense is covered by a company’s earnings
What is the general rule for Times Interest Earned Ratio?
the higher the ratio the higher the credit quality
