Solvability ratio - Financial definition
Financial acronyms
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Concise definition of the term solvability ratio
Solvability ratios, also known as solvency ratios, are financial metrics that measure a company's ability to meet its long-term financial obligations.
Comprehensive definition of the term solvability ratio
Solvability ratios assess the company's long-term solvency and its ability to repay its debts and other obligations over an extended period. They help stakeholders, including investors and creditors, understand a company's financial health and whether it can manage its long-term financial obligations.
Common solvability ratios include:
- Debt to Equity Ratio: : This ratio compares a company's total debt to its shareholders' equity. It indicates the proportion of financing provided by creditors compared to shareholders.
- Debt Ratio: The debt ratio calculates the percentage of a company's assets financed by debt. It reflects the extent of a company's financial leverage.
- Interest Coverage Ratio: This ratio assesses a company's ability to cover its interest expenses with its earnings before interest and taxes (EBIT). It provides insights into the company's capacity to service its debt.
- Debt to Capital Ratio: This ratio analyzes the proportion of a company's capital structure financed by debt. It helps assess the company's reliance on debt funding.