Category Archives for "Solvency Ratio"

Working Capital to Debt Ratio

This is an in-depth guide on how to calculate Working Capital to Debt ratio with detailed analysis, example and interpretation. You will learn how to utilize this ratio's formula to evaluate a firm's solvency.

What is Working Capital to Debt Ratio?​

A financial ratio known as the working capital to debt ratio can help you to evaluate a company’s ability to reduce or eliminate its debt.​

The higher the ratio value, the more positive a feature this capability becomes for any business you may wish to invest in, since it’s generally considered a sign of good financial health.

By comparing a firm’s working capital with the amount of its total debt, you can determine just how quickly and easily that organization could liquidate its cashable assets to repay its debt obligations, should it ever become necessary.

Even though such a drastic step would only be considered under the most extreme circumstances, since it would effectively eliminate all of a company’s working capital (WC), the working capital to debt ratio is still considered a highly significant measure of debt coverage.

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Times Interest Earned Ratio

This is a detailed guide on how to calculate Times Interest Earned (TIE) ratio with thorough interpretation, example, and analysis. You will learn how to use its formula to determine a business debt repayment capacity.

What is Time Interest Earned Ratio?​

The times interest earned ratio is a calculation that allows you to examine a company’s interest payments, in order to determine how capable it is of meeting its debt obligations in a timely fashion.

Also known as the interest coverage ratio, this financial formula measures a firm’s earnings against its interest expenses.

As one of solvency ratios available for evaluating an organization’s debt-servicing ability, the times interest earned ratio offers a relatively refined point of view because it highlights the affordability of a company’s interest payments only.

When you use the times interest earned ratio to examine a potential investment, you’ll discover how close to the line a business is running in terms of the cash it has left over after its interest expenses have been met.

The better a company is at paying its bills on time, without disrupting the efficiency of its regular business operations, the more likely it is to generate the consistent profits needed to fund your investment returns.

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Equity Ratio

This is an in-depth guide on how to calculate Equity Ratio with detailed analysis, interpretation, and example. You will learn how to utilize this ratio's formula to examine a company's current debt situation by looking at its equity.

What is Equity Ratio?​

All of a company’s assets are the result of shareholder equity, loans from creditors, or a combination of both.

The equity ratio, or shareholder’s equity ratio, is a simple calculation that can show you how much of a company’s assets are funded by owner shares.

When you evaluate a business as a potential investment, it’s important to find out as much as possible about its debt situation and its financial sustainability over the long-term.

This powerful ratio can provide you with information in both of these areas.

Because this ratio measures investor commitment to a company in the form of equity invested in assets, it also inversely demonstrates the amount of those assets that are supported and financed by debt.

The lower the ratio value is; the more debt a company has used to fund its assets.

In terms of sustainability, the more capable a company is of servicing its debt load over the long run, the more financially stable it is.

The higher the ratio value, the more solvent a company is considered to be, since shareholder-owned assets are in excess of the firm’s liabilities.

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Debt to Income Ratio

This is a complete guide on how to calculate Debt to Income (DTI) ratio with in-depth interpretation, analysis, and example. You will learn how to utilize its formula to assess a company's solvency.

What is Debt to Income Ratio (DTI)?​

The debt to income ratio offers yet another way for you to measure a company’s income against its current debt load, but it does so by examining monthly revenues and recurring monthly debts.

Although the debt to income ratio is most often used by lending institutions to financially size up a personal loan applicant, it can also be used by those same institutions to gauge a commercial firm’s ability to remain solvent.

This becomes especially important in situations where a business may be looking to borrow additional funds.

The lender involved will want to make sure the company’s income is capable of supporting a higher level of debt, while still leaving enough cash to fund its regular operations.

In a similar fashion, the debt to income ratio can be used just as effectively by you, to evaluate a company’s debt load situation before you decide to invest.

Simply put, the debt to income ratio allows you to calculate what percentage of a firm’s earnings is being spent to cover its monthly debt payments.

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