**Solvency ratios **are used to measure a company’s **ability to meet **its **long-term obligations**. These ratios help investors and creditors determine whether a company can pay back its debt over a longer period of time.

Given this balance sheet...

**Debt-to-Equity Ratio**

This ratio measures the amount of debt a company has compared to its equity. It is calculated by dividing total debt by total equity. A higher debt-to-equity ratio means that a company has more debt relative to its equity, which can indicate that it may have difficulty paying back its debt.

Debt-to-Equity Ratio = Total Debt / Total Equity

Debt-to-Equity Ratio = $50,000 / $85,000

Debt-to-Equity Ratio = 0.59

The debt-to-equity ratio of this company is 59%, which means that the company has more equity than debt.

**Debt-to-Assets Ratio**

This ratio measures the amount of debt a company has compared to its total assets. It is calculated by dividing total debt by total assets. A higher debt-to-assets ratio means that a company has more debt relative to its assets, which can indicate that the company may have difficulty paying back its debt.

Debt-to-Assets Ratio = Total Debt / Total Assets

Debt-to-Assets Ratio = $50,000 / $165,000

Debt-to-Assets Ratio = 0.30

The debt-to-assets ratio of this company is 30%, which means that the company has relatively low levels of debt compared to its assets.

... and given also this income statement...

**Interest Coverage Ratio**

This ratio measures a company’s ability to pay interest expenses on its debt. It is calculated by dividing earnings before interest and taxes (EBIT) by interest expenses. A higher interest coverage ratio means that a company is better able to pay its interest expenses.

Interest Coverage Ratio = Earnings Before Interest and Taxes (EBIT) / Interest Expenses

In this case, we can see that the EBIT is $35,000 and the interest expense is $7,000. Using these numbers, we can calculate the interest coverage ratio as follows:

Interest Coverage Ratio = Earnings Before Interest and Taxes (EBIT) / Interest Expenses

Interest Coverage Ratio = $35,000 / $7,000

Interest Coverage Ratio = 5

The interest coverage ratio of this company is 5, which means that the company has enough earnings to cover its interest expenses over five times. This indicates that the company is in a good financial position to meet its interest obligations.

**OTHER EFFICIENCY RATIOS ARE...**

**Debt Service Coverage Ratio (DSCR)**

This one measures a company’s ability to meet its debt obligations. It is calculated by dividing the company’s net operating income by its total debt service. A DSCR of less than 1 indicates that a company may have difficulty meeting its debt obligations.

**Fixed Charge Coverage Ratio (FCCR)**

This other one is similar to the DSCR, but it includes fixed charges such as lease payments and other fixed expenses. It is calculated by dividing the company’s earnings before interest and taxes (EBIT) plus fixed charges by its total debt service plus fixed charges.

**Equity Ratio**

This ratio measures the proportion of a company’s assets that are financed by equity. It is calculated by dividing total equity by total assets. A high equity ratio indicates that a company has a low level of debt compared to its assets.

**Times Interest Earned (TIE) Ratio**

This one measures a company’s ability to meet its interest payments. It is calculated by dividing the company’s earnings before interest and taxes (EBIT) by its interest expenses. A high TIE ratio indicates that a company is generating enough earnings to cover its interest expenses.

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