This document discusses solvency ratios, which are financial analysis techniques that measure a firm's ability to meet long-term obligations. It defines several types of solvency ratios, including debt ratios that measure the proportion of debt versus equity or capital in a firm's structure, and coverage ratios that indicate whether a firm's earnings are sufficient to cover interest and fixed payments. The document encourages visiting Aarwin's Guide to CFA for more information on analyzing solvency ratios.

1. A A R W I N ' S G U I D E T O C F A
P R E S E N T S
S O L V E N C Y R A T I O S -
F I N A N C I A L A N A L Y S I S
T E C H N I Q U E S ( P A R T 3 )
W W W . A A R W I N S W O R L D O F F I N A N C E . C O M

2. SOLVENCY
RATIOS
Solvency is a firm’s ability
to meet its expenses in the
long run.
Solvency ratios are
measures of solvency that
measure the adequacy of a
firm’s earnings and cash
flows to cover long term
obligations.
Solvency ratios also
measure the efficient use
of debt (leverage) in the
capital structure of the
firm.

3. D I F F E R E N T T Y P E S
O F S O L V E N C Y
R A T I O S

4. ' D E B T ' S O L V E N C Y
R A T I O S

5. It measures the proportion of debt in the capital
structure relative to equity.
Debt to equity ratio
Debt to equity ratio = total debt / total
shareholder’s equity

6. This ratio measures the proportion of debt
in the capital structure. A higher or lower
ratio will indicate the dependency on debt
and the level of solvency.
Debt to capital ratio
Debt to capital = total debt / total
shareholder’s capital

7. This ratio measures what proportion
of the assets is financed by debt. A
higher or indicates a higher level of
leverage.
Debt to assets ratio
Debt to assets ratio = total debt / total
assets

8. ' C O V E R A G E '
S O L V E N C Y
R A T I O S

9. The interest coverage ratio measures
if the earnings are sufficient to cover
the interest payments to be made.
Interest coverage ratio
Interest coverage ratio = EBIT /
interest payments

10. Fixed charge coverage ratio measures the
adequacy of earnings to cover all the fixed
payments to be made by the firm, i.e.
interest and lease payments.
Fixed charge coverage ratio
Fixed charge coverage ratio =
EBIT + lease payments/interest +
lease payments

11. T H A N K Y O U
F O R Y O U R
T I M E
V I S I T A A R W I N ' S G U I D E T O C F A T O
R E A D T H E D E T A I L E D A R T I C L E O N
S O L V E N C Y R A T I O S