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Category Archives for "Solvency Ratio"
17

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.

Definition - 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 TIE 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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Long Term Debt to Capitalization Ratio

This is a detailed guide on how to calculate Long Term Debt to Capitalization Ratio with thorough interpretation, example, and analysis. You will learn how to use its formula to determine a business debt repayment capacity.

Definition - What is Long Term Debt to Capitalization Ratio?

The long term debt to capitalization ratio is another solvency ratio that you can use to evaluate how well a company is using financial leverage to finance its core operations.

This ratio is one of the variations of the regular debt to equity ratio; the only difference is that it takes only the company’s available capital into account instead of the total shareholders’ equity.

You can use this ratio to determine how efficiently a company utilizes its financial leverage, and then compare that with other companies in the same industry to find out who is doing the best job.

In general, companies with a higher long-term debt to capitalization ratio are riskier to invest in because they have a higher debt capital structure.

Conversely, companies that come up with a lower ratio tend to focus more on financing their business by using equity or their shareholders’ capital.

The company’s management always has a choice between using debt and equity to finance their business.

They can use equity, debt, or both, to raise funds, but it should be noted that the end goal of using these approaches is to achieve a balanced capital structure.

With an optimal capital structure, the business can take full advantage of low-cost debt financing, while also preventing the risk of a potential debt default.

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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.

Definition - 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 total debt ratio is still considered a highly significant measure of debt coverage.

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Long Term Debt to Total Asset Ratio

This is a detailed guide on how to calculate Long Term Debt to Total Assets Ratio with in-depth interpretation, example, and analysis. You will learn how to use its formula to evaluate a firm's ability to pay off its long-term debt.

Definition - What is Long Term Debt to Total Assets Ratio?

The long term debt to total assets ratio tells us what portion of the company’s assets are financed by its non-current liabilities, such as loans and other non-current obligations.

It provides us insights about the current standing of a company’s financial position and its ability to meet its financing needs.

It is one of the many ratios that shed light on the capital structure and leverage levels of a company.

We will see how this ratio can benefit both the firm’s management in optimizing the capital structure and the investors in making an informed decision about investing in the firm.

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