What are the most common solvency ratios used by investor or management to understand the current state of a company’s financial situation?
Solvency refers to a company’s ability to meet its long-term obligations and will be affected by the amount of debt in its capital structure. The ratios that you should use to calculate a company’s solvency include the total debt ratio, debt-to-capital ratio, debt-to-equity ratio, and times interest earned ratio.
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How to calculate the debt to equity ratio?
The debt-to-equity ratio is indicative of the degree of financial leverage used. It essentially is used to determine how much debt has been used to finance its assets value relative to the value of shareholders’ equity. The debt-to-equity ratio is used to indicate the degree of protection to creditors in the case of insolvency. For […]
How to calculate the times interest earned ratio?
The times interest earned ratio will indicate the company’s ability to pay off interest charges as they become due. This is a long-term solvency measurement. The formula for the calculating the ratio is to divide EBIT by interest expense: For example, if Pebble Golf Course had EBIT of $100 and interest expense of $20, the […]
How to calculate asset turnover?
Asset turnover is a metric that will help an organization understand how efficiently it is using its assets. The ratio is calculated by dividing total sales by average total assets. For example, if Slippy Drones generated sales of $100 on average total assets of $20, then the asset turnover ratio would be 5x.