Solvency Ratios

Question 1

debt-to-equity ratio formula and definition

Answer 1

total debt / shareholders’ equity

measures firm’s use of fixed- cost financing sources

Question 2

debt-to-capital ratio formula and definition

Answer 2

total debt / (total debt + tot. shareholders’ equity)

capital is all short and long term debt plus pref. stock and equity

Question 3

debt-to-assets ratio formula and definition

Answer 3

total debt / total assets

analyzes how company uses debt

Question 4

incrase or decrease in debt-to-capital ratio means what?

Answer 4

means greater or less reliance on debt as source of financing

Question 5

financial leverage ratio formula and definition

Answer 5

ave total assets / ave total equity

indicates how company uses debt financing

Question 6

interest coverage ratio formula and definition

Answer 6

EBIT / interest payments

firm’s ability to repay its debt obligations

Question 7

fixed charge coverage ratio formula and definition

Answer 7

EBIT + lease payments / interset payment + lease payments

company’s ability to meet its obligations