Liquidity, Solvency, and Leverage Ratios - Solvency
4 important questions on Liquidity, Solvency, and Leverage Ratios - Solvency
What is the substantial difference between 'debt' and 'equity'?
Equity is the ownership interest in the firm.
What are Capital Structure Ratios?
The total debt to the total equity of a corporation is a measure of creditor risk. What does it indicate?
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What kind of Earnings Coverage ratios exist?
1. times interest earned ratio
EBIT
= ----------------------------
Interest Expenses
2. earnings to fixed charges ratio
Include the interest portion associated with LT lease obligations.
Earnings before fixed charges and taxes
= ----------------------------------------------------------------------------------
Fixed charges (= interest, required principal payments, leases)
3. cash flow to fixed charges ratio
Removes the difficulties of comparing amounts overall fixed
charges, not just interest expense.
Note: Cash from operations is after-tax
(Cash from operations + Fixed charges + Tax payments)
= ----------------------------------------------------------------------------------
Fixed charges (= interest, required principal payments, leases)
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