Q5. List of solvency ratios

What are the key financial ratios to analyze the solvency of an entity?

A5.

Solvency ratios are calculated as follows:

(1) Debt to equity ratio

= Total liabilities / Total stockholders’ equity

(2) Debt to assets ratio

= Total liabilities / Total assets

(3) Long-term debt to assets ratio

= Long-term liabilities / Total assets

(4) Times interest earned ratio = (A) / (B)

Where,

(A) = Earnings before interest and taxes (EBIT)

(B) = Interest expense

Earnings before interest and taxes (EBIT)

= Net income + Interest expense + Tax expense

(5) Assets to equity ratio

= Financial leverage ratio

= Average total assets / Average stockholders’ equity