Category Archives for "Solvency Ratio"

Cash Debt Coverage Ratio

This is a complete guide on how to calculate Cash Debt Coverage Ratio with in-depth analysis, example, and interpretation. You will learn how to use its formula to examine a company’s ability to service its debt.

Definition - What is Cash Debt Coverage Ratio?

The Cash Debt Coverage Ratio, or the cash flow to debt ratio, looks at the relationship between the operating cash flow of a company to its total liabilities and implies what the actual ability of the business to pay back its debt from its operations is.

This liquidity ratio is generally regarded as being better when it is high (over 1.0) or at an ideal level of 1:1.This would be seen as very comfortable as it suggests the company has a strong capability of paying off its total debt using the cash flow from its operations.

And this serves as a positive indicator for both investors and creditors.

A cash debt coverage ratio below 1.0 or close to 0 on the other hand, would serve as a strong warning that the financial condition of the company is bleak.

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Debt to Equity Ratio

This is an ultimate guide on how to calculate Debt to Equity (D/E) ratio with detailed example, interpretation, and analysis. You will learn how to use its formula to evaluate a firm's debt settlement capacity.

Definition - What is Debt to Equity Ratio?​

The debt to equity ratio, also known as liability to equity ratio, is one of the more important measures of solvency that you’ll use when investigating a company as a potential investment.

Essentially a gauge of risk, this ratio examines the relationship between how much of a company’s financing comes from debt, and how much comes from shareholder equity.

The more debt a business takes on to fund its operations, the greater level of risk it assumes, since a higher percentage of its financing is being provided by creditors as opposed to investors.

Most firms take on some level of debt, whether it’s to address cash restrictions in the absence of new investment money coming in, or to buy back some of their stock for the purpose of increasing the overall return on investment of the remaining shares.

But when a business becomes so mired in debt that it’s no longer capable of meeting its financial obligations, it can spell disaster for both the company and its shareholders.

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Non-current Assets to Net Worth Ratio

This is an ultimate guide on how to calculate Non-Current Assets to Net Worth Ratio with detailed analysis, example, and interpretation. You will learn how to use its formula to assess a business solvency.

Definition- What is Non-Current Assets to Net Worth Ratio?

The non-current assets to net worth ratio, or the fixed assets to net worth ratio, measures how much of a company’s investments are tied up in fixed or non-current assets.

Fixed assets include those that are low-liquid such as plant and equipment, properties and investments made in intangible assets.

These types of assets are usually not expected to be converted into cash within a single year and are also known as long-term assets.

An acceptable non-current assets to net worth ratio should be 1.25 or lower, as anything above this could mean that the company is highly illiquid and is therefore vulnerable to unexpected events.

Likewise, a ratio of between 1.25 to 1.50 and above might be considered of concern to investors as it could suggest that the business is relying too heavily on low liquid assets that they might have difficulty converting if needed.

It is worth noting that this will, however, vary from industry to industry.

And you must be aware that for capital intensive industries, such as manufacturing, this ratio might be higher but should not necessarily be deemed negative.

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