What are the four solvency ratios?
Asked by: Eve Feil | Last update: October 30, 2025Score: 4.7/5 (9 votes)
What are the 4 solvency ratios?
A solvency ratio examines a firm's ability to meet its long-term debts and obligations. The main solvency ratios include the debt-to-assets ratio, the interest coverage ratio, the equity ratio, and the debt-to-equity (D/E) ratio.
What are the best solvency ratios?
Important to note is that a company is considered financially strong if it achieves a solvency ratio exceeding 20%. So, from our example above, it is clear that if SalesSmarts keeps up with the trend each year, it can repay all its debts within four years (100% / 24.6% = Approximately four years).
What are the CFA solvency ratios?
Solvency ratios measure the ability of a company to meet long-term obligations. Major solvency ratios include debt ratios (including the debt-to-assets ratio, debt-to-capital ratio, debt-to-equity ratio, and financial leverage ratio) and coverage ratios (including interest coverage and fixed charge coverage).
Which ratio is most useful in evaluating solvency?
The debt-to-equity ratio is the most commonly used solvency ratio. This ratio is a critical measure of a company's financial leverage, indicating the proportion of funding from debt relative to equity. This ratio demonstrates how a company is leveraging its debt against the equity employed in its operations.
Solvency Ratios
What are the 5 methods of financial statement analysis?
There are five commonplace approaches to financial statement analysis: horizontal analysis, vertical analysis, ratio analysis, trend analysis and cost-volume profit analysis. Each technique allows the building of a more detailed and nuanced financial profile.
Which company has highest solvency ratio?
As of 2023 March end, Bajaj Allianz Life Insurance has the highest solvency ratio of 5.16% and LIC of India has a solvency ratio of 1.87%.
What is a good personal solvency ratio?
Ideal Range:
A solvency ratio of 20% or higher is typically considered healthy. The higher the ratio, the more secure your long-term financial position. A ratio below 20% may indicate that you are too leveraged, and you might struggle to meet financial obligations in the future.
What is a healthy level of debt for a company?
Generally, a good debt ratio for a business is around 1 to 1.5. However, the debt-to-equity ratio can vary significantly based on the business's growth stage and industry sector. For example, newer and expanding companies often utilise debt to drive growth.
How to calculate solvency?
The solvency ratio formula measures the company's ability to pay long-term debts. Calculate your business's solvency ratio by first adding your net income after taxes and your non-cash expenses. Then divide that number by your liabilities to get your solvency ratio, expressed as a percentage.
What is something to watch out for when using financial ratios?
Financial ratios often depict a company's current state but may not indicate long-term viability. For instance, the current ratio shows short-term liquidity but doesn't account for future cash flows or long-term debt obligations.
What is the most popular liquidity ratio?
The Current Ratio is one of the most commonly used Liquidity Ratios and measures the company's ability to meet its short-term debt obligations. It is calculated by dividing total current assets by total current liabilities. A higher ratio indicates the company has enough liquid assets to cover its short-term debts.
What is a good debt to asset ratio?
In general, a ratio around 0.3 to 0.6 is where many investors will feel comfortable, though a company's specific situation may yield different results.
What are the liquidity and solvency ratios?
Liquidity refers to both an enterprise's ability to pay short-term bills and debts and a company's capability to sell assets quickly to raise cash. Solvency refers to a company's ability to meet long-term debts and continue operating into the future.
What is the turnover ratio formula?
A turnover ratio in business is a measurement of the firm's efficiency. It is calculated by dividing annual income by annual liability. It can be applied to the cost of inventory or any other business cost. Unlike in investing, a high turnover ratio in business is almost always a good sign.
What is a good solvency ratio?
Solvency ratios vary with the type of industry, but as a good measure a solvency ratio of 0.5 is always considered as a good number to have.
What is the rule of thumb for financial ratios?
A common rule of thumb is that a “good” current ratio is 2 to 1. Of course, the adequacy of a current ratio will depend on the nature of the business and the character of the current assets and current liabilities.
Do you want a high or low solvency ratio?
Acceptable solvency ratios vary from industry to industry, but as a general rule of thumb, a solvency ratio of less than 20% or 30% is considered financially healthy. The lower a company's solvency ratio, the greater the probability that the company will default on its debt obligations.
Can insurance companies run out of money?
But a large catastrophic event can cause some insurers to run out of money. In insurance lingo, this is known as “insolvent.” There are also regulations that protect the customers of an insurer that goes insolvent. Most state's have an “insolvency” fund or association that provides a safety net.
What is window dressing?
Window dressing is a short-term strategy used by companies and funds to make their financial reports and portfolios look more appealing to clients, consumers, and investors. The goal is to attract more people and more money, hopefully boosting the next reporting period's bottom line.
What is a common size financial statement?
A common size financial statement displays entries as a percentage of a common base figure rather than as absolute numerical figures. Common size statements let analysts compare companies of different sizes, in different industries, or across time in an apples-to-apples way.
What is 10k?
Publicly traded companies in the U.S. are required to provide yearly reports on their financial activities to both the Securities and Exchange Commission (SEC) and their shareholders. The report provided to the SEC is known as Form 10-K and is sometimes called an annual report because it must be filed every year.