# Solvency Ratios

## Evaluate the solvency of *any business*

Download the free financial ratio ebook and find out which 9 ratios to use to evaluate the solvency of any business.

Solvency and leverage ratios measure how well a company is able to meet it’s long-term debt commitments. In this section, we cover the most important solvency ratios you need to know.

## What are solvency ratios?

Solvency ratios, also known as leverage ratios, look into a company’s capacity to maintain operations by analyzing its debt levels with respect to its assets, equity, and income.

Solvency ratios pinpoint financial issues going on in the business and its ability to cover its bills over the long term. A lot of people think solvency ratios are the same as liquidity ratios.

While the two assess a company’s ability to settle its debts to creditors, banks and bondholders, solvency ratios are more concerned with the longevity than current liabilities. Good solvency ratios mean the company is creditworthy and financially healthy overall.

## List of solvency ratios

Below is the complete list of solvency and leverage ratios we have covered. Each will provide a detailed overview of the ratio, what it’s used for, and why.

They also explain the formula behind the ratio and provide examples and analysis to help you understand them.

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- Accounting Ledger FormatAccounts are simply records of any transaction that has increased or decreased the total balance of an asset, liability or equity item.
- Accounting WorksheetAn accounting worksheet is a tool used to determine the accuracy of the financial statements prepared by a company at the end of the accounting period.
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- Accounts Receivables TurnoverThe accounts receivables turnover is a calculation to measure how successful a company is in collecting money owed to them from customers.
- Accrual PrincipleThe accrual principle is a very important concept in accounting, and it forms the basis of making adjusting entries during the accounting cycle, which we have covered before.
- Accumulated Depreciation to Fixed Assets RatioThe accumulated depreciation to fixed assets ratio is a measurement to compare the amount of depreciation for a physical asset with its total value.
- Adjusted Gross IncomeAdjusted Gross Income (AGI) is the measure of an individual’s taxable income.
- Adjusted Trial BalanceAn adjusted trial balance is a report in which all debit and credit company accounts are listed as they will appear on the financial statements after making adjusting entries.
- Adjusting EntriesAdjusting entries are journal entries (which is why they are sometimes called adjusting journal entries) that are made at the end of the financial reporting period to correct the accounts for the preparation of financial statements.
- Annual Percentage YieldThe annual percentage yield (APY) helps a business or investor to understand how much they are earning from the money they have invested with compounded interest.
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- Asset AccountsAn asset account is a category within a company’s general ledger account that shows the value of the assets it owns.
- Asset Coverage RatioThe asset coverage ratio determines a company’s capacity to pay its debt through its assets.
- Asset TurnoverThe asset turnover ratio is a way to measure the value of a company’s sales compared to the value of the company’s assets.
- Average Collection PeriodThe average collection period is an estimation of the average time period needed for a business to receive payment for money owed to them.
- Average Inventory PeriodAverage inventory period refers to a financial ratio used to compute the average number of days a company takes before they sell all their current stock of inventory.
- Average Payment Period (APP)Average payment period (APP) is a metric that allows a business to see how long it takes on average to pay its vendors.
- Balance SheetThe balance sheet is one of the general-purpose financial statements prepared during the accounting cycle.
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- Bond Equivalent YieldBond equivalent yield (BEY) is a rate that helps an investor determine the annual yield of a bond (or any other fixed-income security), that does not provide an annual payout.
- Bond Value Excel TemplateThis bond pricing Excel template can help you with the following: Bond pricing Bond Valuation Bond Yield For more analysis, see our present value article (a commonly used metric in bond pricing).
- Book Value Per ShareBook value per share (BVPS) is the minimum cash value of a company and its equity.
- Break-Even Point AnalysisBreak-even point analysis examines how much a company can safely stand to lose before descending below its break-even point.
- Break-Even Point Analysis Excel TemplateBreak-even point analysis examines how much a company can safely stand to lose before descending below its break-even point.
- Business Entity ConceptThe business entity assumption is an accounting principle that makes a legal distinction between the transactions carried out by a business and the transactions of the owner.
- Business EventsA business event is a business transaction in which there is an exchange of value between two groups.
- Capital Asset Pricing ModelThe Capital Asset Pricing Model (CAPM) provides a way to calculate the expected return of an investment based on the time value of money and the systematic risk of the asset.
- Capital Asset Pricing Model (CAPM) Excel TemplateThe Capital Asset Pricing Model (CAPM) provides a way to calculate the expected return of an investment based on the time value of money and the systematic risk of the asset.
- Capital BudgetingIt was pointed out in the valuation of corporate securities overview that the value of an asset, whether financial or real, depends on the discounted value of cash flows over a relevant time horizon.
- Capital Gains YieldA capital gains yield is the rise in the price of a security, like common stock, over a given period of time.
- Capital Intensity RatioCapital intensity ratio (CIR) is a metric that shows you how much capital is needed to generate $1 of revenue.
- Capital Lease AccountingCapital lease accounting refers to the accounting treatment of assets leased by a business under a capital lease agreement.
- Capitalization RatioThe capitalization ratio, also referred to as the cap ratio, is an indicator that measures the ratio between a company’s debts within its capital structure—the combination of debts and equities.
- Cash Conversion Cycle (CCC)The cash conversion cycle (CCC) is a measure of time indicated in days needed to convert inventory investments and other resources into sales-derived cash flow.
- Cash Earnings Per Share (Cash EPS)Cash earnings per share (Cash EPS) is a profitability ratio that compares a company’s cash flow against their volume of shares outstanding.
- Cash Flow Adequacy RatioThe cash flow adequacy ratio is used to determine if the cash flow generated by a company is sufficient to pay for its ongoing expenses—for example, reductions in long-term debt, acquisition of fixed assets or paying dividends to shareholders.
- Cash Flow Coverage RatioThe cash flow coverage ratio represents the relationship between a company’s operating cash flow and its total debt.
- Cash Flow Statement – Direct MethodA statement of cash flows can be prepared by either using a direct method or an indirect method.
- Cash Flow Statement – Indirect MethodA statement of cash flows can be prepared by either using a direct method or an indirect method.
- Cash Flow to Debt RatioThe cash flow to debt ratio is a coverage ratio that reflects the relationship between a company’s operational cash flow and its total debt.
- Cash RatioThe cash ratio (also known as the cash coverage ratio) is a measurement of how well can the company pay its short-term debt in the form of cash and cash equivalent (investment items that immediately available to be turned into cash e.
- Cash Reinvestment RatioThe cash reinvestment ratio, also known as the cash flow reinvestment ratio, is a valuation ratio used to measure the percentage of annual cash flow that the company invests back into the business as a new investment.
- Cash Return On Assets RatioThe cash return on assets (cash ROA) ratio is a measure of the operational cash flow against the total assets owned by a business.
- Cash to Current Assets RatioCash to current assets is a liquidity ratio that measures how much of the current assets in a company are made up of cash and cash equivalents.
- Cash to Current Liabilities RatioCash to current liabilities ratio, also known as the cash ratio, is a cash flow measure that compares the firm’s most liquid assets to its short-term obligations.
- Cash to Working Capital RatioThe cash to working capital ratio measures what percentage of the company’s working capital is made up of cash and cash equivalents such as marketable securities.
- Cash Turnover Ratio (CTR)The cash turnover ratio (CTR) a profitability and efficiency ratio that measures how many times a company uses its cash to generate revenues.
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- Chart of AccountsThe chart of accounts refers to the directory of every account made in the general ledger in an accounting system.
- Classified Balance SheetA classified balance sheet is a financial statement that reports the assets, liabilities and equity of a company.
- Closing EntriesClosing entries are manual journal entries at the end of an accounting cycle to close out all the temporary accounts and shift their balances to permanent accounts.
- Compound Annual Growth Rate (CAGR)Compound annual growth rate (CAGR) is the metric that allows an investor to compare the return rates of their investments over a given time period.
- Conservatism PrincipleThe conservatism or prudence principle in accounting is the general concept of recognizing expenses and liabilities as soon as possible when there is uncertainty.
- Consistency PrincipleThe consistency principle states that once a company adopts a certain accounting policy or method, it must be applied consistently in the future as well.
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- Contract for Difference (CFD)A contract for difference, often abbreviated to CFD, is an alternative means by which an individual can invest in a company or asset.
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- Correlation CoefficientThe correlation coefficient, also called the Pearson correlation, is a metric that reflects the relationship between two numbers.
- Cost Benefit PrincipleThe cost benefit principle states that the cost of providing the information in the financial statements should not exceed the benefits that the users get from reading those statements.
- Cost of Goods Manufactured (COGM) Excel TemplateThe cost of goods manufactured (COGM) is a managerial accounting term that is used to show the total production costs for a specific time period.
- Cost of Goods Sold (COGS)Cost of goods sold (COGS) is the total value of direct costs related to producing goods sold by a business.
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- Crossover RateCrossover rate is the cost of capital where two projects have the same net present values (NPV) or where their NPV profiles intersect.
- Current RatioCurrent ratio determines the ability of a company or business to clear its short-term debts using its current assets.
- Current YieldThe current yield is the return that an investor would receive, based on a current rate.
- Days Cash on HandDays cash on hand is the number of days a company can keep up with its operating expenses using the cash available in the business.
- Days Payable Outstanding (DPO)Days payable outstanding (DPO) is a ratio measuring the average time a company takes to pay its invoices & bills to suppliers and vendors.
- Days Sales in Inventory (DSI)Days sales in inventory (DSI) refers to a financial ratio showing the number of days a company takes to turn over all its inventory.
- Days Sales Outstanding (DSO)Days Sales Outstanding (DSO) refers to the average number of days a company takes to collect its payments from the creditors.
- Days Working CapitalDays working capital is a measurement that reports the number of days it takes for the working capital to be converted into revenue.
- Debits and CreditsDebits and credits are accounting entries that record business transactions in two or more accounts using the double-entry accounting system.
- Debt RatioDebt ratio is a measurement that indicates how much leverage a company uses to finance its operation by using debt instead of its truly owned capital or equity.
- Debt Service Coverage RatioThe debt coverage ratio is used to determine whether or not a company can turn enough of a profit to cover all of its debt.
- Debt Service Coverage Ratio (DSCR) Excel TemplateThe debt coverage ratio is used to determine whether or not a company can turn enough of a profit to cover all of its debt.
- Debt to Asset RatioDebt to asset, also known as total debt to total asset, is a ratio that indicates how much leverage a company can use by comparing its total debts to its total assets.
- Debt to Capital RatioThe debt to capital ratio is a ratio that indicates how leveraged a company is by dividing its interest-bearing debt with its total capital.
- Debt to EBITDA RatioThe debt to EBITDA ratio is a leverage metric that measures the amount of income that is available to pay down debt before covering interest, taxes, depreciation, and amortization expenses.
- Debt to EquityDebt to equity is a financial liquidity ratio that measures the total debt of a company with the total shareholders’ equity.
- Debt to Income Ratio (DTI)Debt to income (DTI) is a ratio measuring an individual’s ability to pay their debts.
- Debt to Net Worth RatioThe debt to net worth ratio is a financial metric used in comparing the level of debt of a company with its net worth.
- Defensive Interval Ratio (DIR)Defensive interval ratio (DIR), also known as the defensive interval period (DIP) or basic defense interval (BDI), determines how many days a company can keep operating.
- DepreciationDepreciation is the cost that is allocated to a fixed asset over its useful life.
- Discounted Cash Flow (DCF) Excel TemplateDiscounted cash flow (DCF) is a method used to estimate the value of an investment based on future cash flow.
- Discounted Payback PeriodThe discounted payback period is a projection of the time it will take to receive a full recovery on an investment that has an accompanying discount rate.
- Dividend Discount Model (DDM) Excel TemplateThe present value of stock can also be found using the Discounted Dividend Model.
- Dividend Payout RatioThe dividend payout ratio (DPR) is the amount of money that a company pays in dividends to its shareholders in comparison to its net income.
- Dividend Per ShareDividend per share (DPS) is an amount of money paid by a company to its shareholders.
- Dividend PolicyOnce a company makes a profit, management must decide on what to do with those profits.