## Solvency Ratios

Ratios

**Solvency Ratios**

Solvency ratios measure the ability of a company to pay its long-term liabilities, such as debt and the interest on that debt. These ratios should normally be calculated when financial statements are prepared - monthly, quarterly, and annually.

**Times Interest Earned (TIE) Ratio**

- What It Tells Us:
**Times Interest Earned**measures a company’s ability to pay its interest expense based on its current operating income. - Calculation: Earnings Before Interest and Income Tax for a Period divided by Interest Expense for a Period
- Formula: Times Interest Earned = Earnings Before Interest and Income Tax / Interest Expense
- How Normally Expressed: Decimal Number
- Bad or Good: The lower the ratio (bad), the more a company is burdened by debt expenses. When a company's interest coverage ratio is only 1.5 or lower, its ability to meet interest expenses may be questionable. You should use your financial information to spot trends and compare to industry averages if available.

- Additional Clarification: A ratio of 0.5 means that you only have $0.50 of earnings for every 1.00 of interest expense. A ratio of 1.5 means you have $1.50 of earnings for every $1.00 of interest.

Example:

Times Interest Earned | |||

Information: Dollars in thousands | Month | Quarter | Year |

Earnings Before Interest & Income Tax For Period | 17 | 58 | 201 |

Interest Expense For Period | 1 | 3 | 9 |

Times Interest Earned | 17.0:1 | 19.3:1 | 22.3:1 |

Earnings Before Interest & Income Tax / Interest Expense |

**Debt-to-Assets Ratio (Debt Ratio)**

- What It Tells Us:
**Debt To Assets Ratio**measures what percentage of a business's assets is is financed using debt. - Calculation: Total Liabilities divided by Total Assets multiplied by 100

Multiplying by 100 converts the decimal to a percent

- Formula: Debt To Assets Ratio = (Total Liabilities / Total Assets) x 100

- How Normally Expressed: Percentage
- Bad or Good: The higher the ratio the riskier the company is to creditors. A ratio equal to or greater than 100% shows that all of a company's assets are funded by debt. A ratio below 100% means that a company's assets are funded with equity and debt. A high ratio means a higher risk; it means that a company has been financing its growth with debt. So, creditors would probably exercise caution when extending credit with a ratio above 60%. You should use your financial information to spot trends and compare to industry averages if available.
- Additional Clarification: A ratio of 50% (.5) means that you have $0.50 of debt for every $1.00 of assets. A ratio above 100% (1.0) indicates you have more debt than assets. So, a ratio of 150% (1.5) means you have $1.50 of debt for every $1.00 of assets (potential bankruptcy).

Example:

Debt To Assets Ratio | |||

Information: Dollars in thousands | Month | Quarter | Year |

Total Liabilities For Period | 131 | 126 | 125 |

Total Assets For Period | 210 | 225 | 300 |

Debt To Assets Ratio | 62.4% | 56.0% | 41.7% |

Total Liabilities / Total Assets x 100 |

**Debt-to-Equity Ratio**

- What It Tells Us:
**Debt To Equity Ratio**measures a company's debt position as related to its equity. A high ratio means a higher risk; it means that a company has been aggressive in financing its growth with debt. A high debt-to-equity ratio could indicate that your company might have trouble borrowing more money, or that it may borrow money only at a higher interest rate than if the ratio were lower. - Calculation: Total Liabilities divided by Total Equity multiplied by 100

Multiplying by 100 converts the decimal to a percent

- Formula: Debt To Equity Ratio = (Total Liabilities / Total Equity) x 100
- How Normally Expressed: Percentage
- Bad or Good: The higher the ratio the riskier the company is to creditors. Generally speaking, a ratio below 100% would be seen as relatively safe, whereas ratios of 200% or higher would be considered risky. You should use your financial information to spot trends and compare to industry averages if available.
- Additional Clarification: A ratio of 50% (.5 ) means that you have $0.50 of debt for every $1.00 in equity. A ratio above 100% (1.0) indicates you have more debt than equity. So, a ratio of 150% (1.5) means you have $1.50 of debt for every $1.00 in equity.

Example:

Debt To Equity Ratio | |||

Information: Dollars in thousands | Month | Quarter | Year |

Total Liabilities For Period | 131 | 126 | 125 |

Total Equity For Period | 79 | 99 | 175 |

Debt To Equity Ratio | 165.8% | 127.3% | 71.4% |

Total Liabilities / Total Equity x 100 |

**Bad or Good**? The higher the ratios the riskier the company is to creditors. Our calculated example ratios would not appear to be an area of concern for creditors.

Now, on to

**Activity Ratios**