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



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

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