Solvency Ratios - is a key metric used to measure an enterprise’s ability to meet its

obligations and used often by prospective business lenders. The solvency ratio indicates
whether a company’s cash flow is sufficient to meet its short and long term liabilities.

Solvency Ratios
1. Time interest Earned
2. Debt Ratio
3. Equity Ratio
4. Debt to Equity Ratio

1. Time interest Earned - It evaluates the ability of a company to pay the interest on its debt.

Formula:

Time interest Earned = Operating income / Interest Expense

Example :
Operating income = P 343,008 Interest Expense = P 74,208

Time interest Earned = 343,008 / P 74,208 = 4.62

2. Debt Ratio - measures the percentage of assets funded by creditors.

Formula:

Debt Ratio = Total liabilities / Total Assets

Example:
Total Liabilities = P 1,832,936 Total Assets = P 74,208

Debt Ratio = 1,832,936 / 74,208 = 0.47 or 47%

3. Equity Ratio - indicates the percentage of assets funded by the owners.

Formula:

Equity Ratio = Total Equity / Total Assets

Example:
Total Equity = P 2,089,017 Total Assets = P 3,921,953

Equity Ratio = 2,089,017 / 3,921,953 = 0.53 or 53%

4. Debt to Equity Ratio - is a financial ratio indicating the relative proportion of shareholders
and equity and debt used to finance company assets.
Formula:

Debt to Equity Ratio = Total Liabilities / Total Equity

Example:
Total Liabilities = P 705,000 Total Equity = P 1,003,500

Debt to Equity Ratio = 705,000 / 1,003,500 = 0.70