Solvency Ratio is a method or tool to gauge the ability of a company to meet its debt obligations. Investors use this ratio to decide upon the company probability to default on meeting the liability.
*Non-Cash Expenses example - Depreciation or Amortization
The ratio helps in estimating the company’s cash in hand to meet its liabilities. Lower the ratio, higher the chance of defaulting.
The other solvency ratios:
Debt to Equity Ratio is a formula to measure the total debt the company has taken i.e. both short and long-term debt, concerning the total equity. It helps to gauge whether the business has more funds through equity or debt. Higher the ratio, more is the debt obligation.
Total Debt to Total Asset
This measures the company’s tangible and intangible asset ability to meet the liabilities.
Interest coverage ratios
It helps to assess the company ability to pay interest on debt in a given financial year.