# Review of solvency ratios

Q45. Review of solvency ratios
Calculate the following solvency ratios based on the information below:
(1) Debt to equity ratio
(2) Debt to assets ratio
(3) Long-term debt to assets ratio
(4) Times interest earned ratio
(5) Assets to equity ratio

Current liabilities = \$300,000
Long-term liabilities = \$1,500,000
Total liabilities = \$1,800,000
Total stockholders’ equity = \$1,200,000
Total assets = \$3,000,000
Average stockholders’ equity = \$1,100,000
Average total assets = \$2,750,000

Net income = \$350,000
Interest expense = \$50,000
Tax expense = \$125,000
Earnings before interest and taxes (EBIT) = \$525,000

A45.
(1) Debt to equity ratio
= Total liabilities / Total stockholders’ equity
= \$1,800,000 / \$1,200,000 = 1.5

(2) Debt to assets ratio
= Total liabilities / Total assets
= \$1,800,000 / \$3,000,000 = 0.6

(3) Long-term debt to assets ratio
= Long-term liabilities / Total assets
= \$1,500,000 / \$3,000,000 = 0.5

(4) Times interest earned ratio
= Earnings before interest and taxes (EBIT) / Interest expense
= (Net income + Interest expense + Tax expense) / Interest expense
= (\$350,000 + \$50,000 + \$125,000) / \$50,000
= \$525,000 / \$50,000 = 10.5

(5) Assets to equity ratio
= Average total assets / Average stockholders’ equity
= \$2,750,000 / \$1,100,000 = 2.5