Definition, What is solvency ratio, and How ... - ClearTax

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A solvency ratio is a general measure of solvency, as it measures a firm's actual cash flow, rather than net income, by adding depreciation and ... Products IT IncomeTaxFiling FileIncometaxreturnsforfreein7minutes EX ExpertAssistedServices Getexperthelpfortaxfilingorstartingyourbusiness 80c New TaxSaving CuratedMutualFunds&plansfortaxsavings MF New MutualfundInvestments InvestinbestGrowthmutualfunds GST GSTSoftware CompleteGSTfiling&billingsolution TC TaxCloud(DirectTaxSoftware) I-T,e-TDS&AuditSoftwareforCAs&TaxProfessionals EINV e-InvoicingSoftware Completesolutionforallyoure-invoicingneeds Aboutus HelpCenter IncomeTax GST e-Invoicing MutualFunds Business LogIn Wheredoyouwanttologin? IncomeTaxE-Filing GSTSoftware MutualFunds SignUp SignUp SignUp LogIn IncomeTaxE-Filing GSTSoftware MutualFunds Products IT IncomeTaxFiling EX ExpertAssistedServices 80c TaxSaving MF MutualFundInvestments GST GSTSoftware TC TaxCloud(DirectTaxSoftware) NeedHelp? Aboutus FileITR,invest&saveupto₹46,800intaxesonthego 0%commission•Earn upto1.5%extrareturns Getdownloadlink Downloadlinksent Forandroid&IOSusers FileITR,invest&saveupto₹46,800intaxesonthego 0%commission•Earn upto1.5%extrareturns Getdownloadlink Downloadlinksent Forandroid&IOSusers Glossary Trending home CorporateFinanceandAccounting FinancialRatios solvencyratio Category CorporateFinanceandAccounting Subcategories solvencyratio ReviewedbyVishnava|UpdatedonDec17,2021 Share Catalogue IntroductiontoSolvencyRatio Asolvencyratioisavitalmetricusedtoseeabusiness'sabilitytofulfillong-termdebtrequirementsandisusedbyprospectivebusinesslenders.Itshowswhetheracompany'scashflowisgoodenoughtomeetitslong-termliabilities.Itis,therefore,consideredtoameasureofitsfinancialhealth.Anunfavourableratiocanshowsomelikelihoodthatacompanywilldefaultonitsdebtobligations. Theprincipalsolvencyratiosarethedebt-to-assetsratio,theinterestcoverageratio,theequityratio,andthedebt-to-equity(D/E)ratio.Thesemeasurescanbecomparedwithliquidityratios,whichconsiderafirm'scapabilitytomeetshort-termobligationsratherthanmedium-tolong-termones. UnderstandingSolvencyRatios Solvencyratiosareoneofmanymetricsappliedtodeterminewhetheracompanycanstaysolventinthelongterm. Asolvencyratioisageneralmeasureofsolvency,asitmeasuresafirm'sactualcashflow,ratherthannetincome,byaddingdepreciationandothernon-cashexpensestoevaluateacompany'scapacitytostayafloat. Itestimatesthiscashflowcapacityinrelationtoallliabilities.Thisway,asolvencyratioestimatesacompany'slong-termhealthbyevaluatingitsrepaymentabilityforitslongtermdebtandtheinterestonthatdebt. TypesOfSolvencyRatios Debttoequityratio-Debttoequityisknowntobeoneofthemostuseddebtsolvencyratios.ItisalsodescribedastheD/Eratio.Thedebttoequityratioisusuallydeterminedbydividingacompany'stotalliabilitieswiththeshareholder'sequity—thesecompany'sobtainedfromthebalanceshareholder'scompany'sfinancialstatements. DebtRatio-Adebtratioisafinancialratiousedinestimatingacompany'sfinancialleverage.Itisdeterminedbytakingthetotalliabilitiesanddividingthembytotalcapital.Ifthedebtratioishigher,itsignifiesthatthecompanyisriskier.Thelong-termdebtsinvolvebankloans,bondspayable,notespayableetc. ProprietaryRatioOrEquityRatio-Proprietaryratiosarealsoknownasequityratio.Itbuildsarelationshipbetweentheproprietor'sfundsandthenetassetsorcapital. InterestCoverageRatio-Theinterestcoverageratioisappliedtodeterminewhetherthecompanyisabletopayinterestontheoutstandingdebtobligations.Itisevaluatedbydividingthecompany'sEBIT(Earningsbeforeinterestandtaxes)withtheinterestpaymentdueondebtsfortheaccountingperiod. RelatedTerms RecentTerms FileGSTReturnswithClearTax Easy-to-use&100%accurateSoftware Auto-computeGSTR-9 Reconcilefiledreturnswithsalesandpurchase SingleclickuploaddatathroughTallyconnector Start30daysfreetrial Trustedby 4million CAAssisted Services Yourdatais safe&private TaxSavingInvestmentMadeSimple OnlyBestFundsPickedbyExperts CompletelyFREE&SimpletoInvest Highestreturnsamong80C Savetaxesupto₹46,800 SaveTax GrowWealth Trustedby 4million CAAssisted Services Yourdatais safe&private #

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