Solvency Ratios Flashcards
What does it mean to say that a company is solvent?
A company had more total assets than total liabilities.
What is Debt-to-Equity?
The amount of debt relative to shareholder’s equity.
Used to evaluate a company’s financial leverage.
What is leverage?
Using debt to purchase assets.
Do you want a high or low debt-to-equity ratio?
Low
The higher it is, the more aggressive a company has been in financing its growth with debt, which is riskier to stockholders.
What is Total Debt-to-Capitalization?
The portion of total financing represented by debt.
What is Capitalization?
The amount of money raised to purchase assets.
Do you want the Total Debt-to-Capitalization ratio to be high or low?
Low
The lower it is, the less the company;s capital structure consists of debt.
What is Interest Coverage?
The ability to cover interest expenses from earnings.
Measures how many times a company could pay its current interest payments with its available earnings.
How do you calculate EBIT (Earnings Before Interest and Tax)?
Revenue-Operating Expenses
OR
Net Income + Interest + Taxes
Do you want interest coverage to be low or high?
High, at least 1.5
What is Cash Flows to Total Liabilities?
The portion of total obligations that could be met with operating cash flows.
Do you want Cash Flows to Total Liabilities to be high or low?
High
A higher ratio indicates that a company is better able to pay back its debts and is thus able to take on more debt if necessary.
