Solvency and Coverage Flashcards
(11 cards)
What are Solvency Ratios?
Definition
How likely a company is to stay in business and avoid bankruptcy
Debt / Equity Ratio
Ratio
total liabilities / total stockholders’ equity
What is the Debt / Equity Ratio?
What does the Ratio show?
How much borrowed money vs. owner’s money is used to run the business.
What is the general rule for Debt/Equity ratio?
the lower the better
the higher the risker
Long Term Debt / Equity Ratio
Ratio
long term debt (only financial) / total stockholders’ equity
Equity Multiplier ratio
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
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
