Category Archives for "Solvency Ratio"

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.

Definition - 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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Long Term Debt to Equity Ratio

This is a complete guide on how to calculate Long Term Debt to Equity Ratio with detailed interpretation, example, and analysis. You will learn how to use its formula to assess a business debt settlement capacity.

Definition - What is Long Term Debt to Equity Ratio?

The long term debt to equity ratio, also known as the long-term debt to capital ratio, is a capital structure ratio that throws light on the financial solvency of a company.

This ratio works by comparing a company’s long-term debt with its capital, thereby providing you insights on how the company finances its core operations (by using both equity and debt financing).

The long-term debt to debt ratio is different from the regular debt to equity ratio as we are only looking at the long term debt here (excluding any short term obligations that the company may have).

This ratio tells us about the respective claim of creditors and owners over the firm’s assets.

The ideal range for this ratio would depend on the industry in which the firm is operating as some industries utilize more debt financing than others.

For instance, financial institutions have a higher ratio as they borrow money to lend it further.

You will find that capital intensive industries have a higher ratio as compared to some other industries which are not as capital intensive.

However, as an investor, you will want to look for companies with a low long-term debt to capital ratio since you don’t want to risk your money in a high debt company.

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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.

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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