Solvency ratios - AccountingTools

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Solvency ratios compare different elements of an organization's financial statements. The intent of this comparison is to discern the ... AccountingTools CPECourses CPECourses CPELogIn HowtoTakeaCourse StateCPERequirements Books CollegeTextbooks AccountingBooks FinanceBooks OperationsBooks Articles Articles TopicsIndex SiteArchive Podcast AccountingBestPractices PodcastIndex PodcastSummary Dictionary FAQs About About Contact EnvironmentalCommitment Home AccountingTools CPECourses/CPECoursesCPELogInHowtoTakeaCourseStateCPERequirements Books/CollegeTextbooksAccountingBooksFinanceBooksOperationsBooks Articles/ArticlesTopicsIndexSiteArchive Podcast/AccountingBestPracticesPodcastIndexPodcastSummary Dictionary/ FAQs/ About/AboutContactEnvironmentalCommitment Home/ AccountingTools AccountingCPECourses&Books Articles AccountingTools CPECourses/CPECoursesCPELogInHowtoTakeaCourseStateCPERequirements Books/CollegeTextbooksAccountingBooksFinanceBooksOperationsBooks Articles/ArticlesTopicsIndexSiteArchive Podcast/AccountingBestPracticesPodcastIndexPodcastSummary Dictionary/ FAQs/ About/AboutContactEnvironmentalCommitment Home/ WhatareSolvencyRatios?Solvencyratioscomparedifferentelementsofanorganization'sfinancialstatements.Theintentofthiscomparisonistodiscerntheabilityofthetargetentitytoremainsolvent.Solvencyratiosarecommonlyusedbylendersandin-housecreditdepartmentstodeterminetheabilityofcustomerstopaybacktheirdebts.ExamplesofSolvencyRatiosExamplesofsolvencyratiosarenotedbelow.CurrentRatioThecurrentratioiscurrentassetsdividedbycurrentliabilities,andindicatestheabilitytopayforcurrentliabilitieswiththeproceedsfromtheliquidationofcurrentassets.Theratiocanbeskewedbyaninordinatelylargeamountofinventory,whichcanbehardtoliquidateintheshortterm.QuickRatioThequickratioisthesameasthecurrentratio,exceptthatinventoryisexcluded(whichmakesitabetterindicatorofsolvency).Theremainingassetsinthenumeratoraremoreeasilyconvertibleintocash.DebttoEquityRatioThedebttoequityratiocomparestheamountofdebtoutstandingtotheamountofequitybuiltupinabusiness.Iftheratioistoohigh,itindicatesthattheownersarerelyingtoanexcessiveextentondebttofundthebusiness,whichcanbeaproblemifcashflowcannotsupportinterestpayments.InterestCoverageRatioTheinterestcoverageratiomeasurestheabilityofacompanytopaytheinterestonitsoutstandingdebt.Ahighinterestcoverageratioindicatesthatacompanycanpayforitsinterestexpenseseveraltimesover,whilealowratioisastrongindicatorthatacompanymaydefaultonitsloanpayments.Ifthereisaspecificratiothatisconsideredtheessentialsolvencyratio,itisacomparisonofprofitsbeforenon-cashitems,dividedbyallliabilities.Theformulais:(Netafter-taxprofits+Depreciation+Amortization) ÷Allliabilities InterpretingSolvencyRatiosAhighsolvencyratioindicatesabetterabilitytomeettheobligationsofthebusiness.However,theratioisnotfullyindicativeofsolvency,sinceitisbasedonprofits,whichdonotnecessarilyequatetocashflows.Asolvencyanalysisalsodoesnotaccountfortheabilityofabusinesstoobtainnewlong-termfunding,suchasthroughthesaleofsharesorbonds.Thus,theuseofsolvencyratiosshouldbesupplementedwithotherinformationtogainafullunderstandingofthesolvencyofabusiness.Itisbesttoreviewallsolvencyratiosonatrendline,toseeiftheconditionofabusinessisworseningovertime.RelatedCoursesBusinessRatiosGuidebookCreditandCollectionGuidebookTheInterpretationofFinancialStatements Junkbonddefinition Timesheetdefinition CPECourses/CPECoursesCPELogInHowtoTakeaCourseStateCPERequirements Books/CollegeTextbooksAccountingBooksFinanceBooksOperationsBooks Articles/ArticlesTopicsIndexSiteArchive Podcast/AccountingBestPracticesPodcastIndexPodcastSummary Dictionary/ FAQs/ About/AboutContactEnvironmentalCommitment Home/ AccountingTools CollegeTextbooksAccountingBooksFinanceBooksOperationsBooks Sendusyoure-mailaddresstoreceivemonthlycoursediscounts * Thankyou! Copyright2021

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