Solvency Ratio Assignment Help, Solvency Ratio Tutoring
Solvency Ratio Homework Help, Solvency Ratio Tutor Help
Solvency Ratio:
Solvency ratio is a ratio that is used to measure the ability of a company to meet
ist long term commitments or obligations. It measures a company's ability to service
debt and is expressed as a percentage. It is computed as:
Net profit after taxes +
Depreciation
Long term liabilities + Short term liabilities
Long term liabilities + Short term liabilities
Higher the ratio, the better indication that the company is in a sound financial
health and would be able to meet its debt obligations. Higher the ratio, higher
is the degree of comfort enjoyed by the creditors of the company. A low ratio on
the other hand may indicate the likelyhood of default on debt commitments by the
company. This ratio is also closely watched by potential lenders to assess the risk
involved in lending and gauge the ability of the company to repay the amount. The
ratio however varies from one industry to another and must be compared with the
norms for the industry to assess if the company has a decent solvency ratio.
Example:
A company earned a net profit of $452,435 during the year 2009. The depreciation
expense for the year amounted to $38,754. The company had short term liabilities
of $1,234,964 and long term liabilities of $2,765,432. Calculate the company's solvency
ratio.
$452,435 + $38,754
$1,234,964 + $2,765,432
=> 12.28%
$1,234,964 + $2,765,432
=> 12.28%
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