Four Important Solvency Ratios

These important ratios help you manage your business.

Whether you decide to prepare your own financial statements, to use a software program or to have them done for you by a qualified professional, understanding these ratios will help you keep track of your profitability and debts. If you ever need to acquire financing, knowing these ratios and figures will be invaluable.
1. Debt to Equity= Total Debt / Owner’s Equity.
This indicates the degree of financial leverage that you’re using to enhance your return. Discovering a rising debt-to-equity ratio lets you know to be careful with your fixed assets and can prevent increases in debt caused by inventory purchases.
2. Debt to Assets = Total Debt / Total Assets.
This measures the percentage of assets financed by creditors compared to the percentage that have been financed by the business owners.
3. Coverage of Fixed Charges = Net income Before Taxes + Fixed Charges / Amount of Fixed Charges.
This measures your ability to meet any fixed obligation of the business. Often banks and lenders require you to maintain this ratio at a specified level, so that the lender has some assurance that you’ll continue to be able to make your payments.
4. Interest Coverage = Operating Income / Interest Expense.
This measures how many times your interest obligations are covered by earnings from operations-the higher the ratio, the better your ability to meet interest payments.
For assistance with these ratios or to discuss these further, please feel free to contact us.

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