In simple terms of business, solvency is the extent to which an individual’s or corporation’s current assets can surpass the level of the current liabilities. It is a capability by which an individual or business corporation can grow or expand from current status. Solvency is calculated by net liquid balance.
There are several ratios that can calculate a company’s long-term debts; solvency is one of them. This ratio is calculated as the ratio of the sum of net income of the company after tax and depreciation and the sum of short and long-term liabilities. Hence,
Solvency Ratios = Net income + depreciation
                           Short term liabilities + long term liabilities
In terms of insurances, the solvency ratio is the extent of the capital of the business with respect to all the risks. With solvency ratios homework answers you will get a detailed idea!
What to expect in solvency ratios homework answer helps:
Other than explaining what solvency ratio is, the Solvency Ratios homework answers helps or the homework itself should have the followings as well:
- The variety of solvency ratios. The primary ones are the debt to equity (ratio between debt capital and equity capital) and the coverage ratio (measurement of a company’s ability to cover the debts). But there are others too, which will be explained But these are an important component of a solvency ratios homework answer helps or the homework assignment.
- The details of measurement of solvency ratio. For example, solvency ratios never only calculate the net income but also the cash flow of a business including the depreciation values of the company. Also, the ratios take cash flow capacity into account with respect to Not to forget, that liability includes the debts, borrowings (short and long term). In this way, solvency becomes a better measurement, especially for companies who have large depreciations.
- Also, the answers should reflect, the comparison of the solvency ratio of a company’s competitors as well. It should not be a standalone comparison of one company.
- Now, let’s go into detailed interpretations.
The solvency ratios homework answers helps or the homework itself should have these calculations included as well.
The calculations included are:
Debt to assets ratio:
This is simply a ratio of the debt to the total assets of a company. As an example, if the debt: asset ratio of a company For, example, if a debt to asset ratio of a company is 0.5, that will signify that 50 percent of the assets of the company’s financial sources are debt. Higher the ratio, higher is the risk for the company, thus the company will be in a weak solvency. The solvency ratios homework answers is a true respite.
Debt to the capital ratio:
This ratio measures the company’s capital (debt and equity) with total debt. Hence, like debt to assets ratio, a higher debt to capital ratio means a higher economic risk of the company and hence weaker solvency.
Debt to equity ratio:
This is a direct measurement of debt capital with respect to equity. If the ratio is ‘1′, that means the company has equal debt and equity. Hence, for this one as well, as the ratio gets high, the risk for the company increases. A low debt to equity ratio indicates an economically stable business operation.
Financial leverage ratio:
This ratio calculates how much each money unit or segment of an equity of a company is assisting the total assets. In a numerical example, if this value is 4 which implies that 0.1 of each equity unit supports 0.4 of the total assets of a company. As this ratio gets increased, the company will possibly get higher economic leverage. This ratio is also sometimes explained by average equity and assets.
Coverage or interest coverage ratio:
This is also another measure of calculating economic leverage of a company. It calculates the level to which interest can get covered by earnings. In contrast to most of the solvency ratios, as the coverage ratio gets higher, the solvency of a company also gets stronger.Because this means an indication that the company can look for its debts from the current earnings of operation. Banks will also be interested more in loaning the money to a company like this.
The solvency ratios homework answers are here!
Then let me explain to you a live example of debt to equity ratio. Here is a list of information about company ABC. These must be included in Solvency Ratios homework answer helps.
- Debt to equity ratio:
| Company ABC | |
| Short-Term Debt | Â $ 5000 |
| Long-Term Debt | $10,000 |
| Total Debt | $15,000 |
| Equity (Preferred) | $250 |
| Equity (Common) | $500 |
| Additional payment in Capital | $ 2000 |
| Earnings that were retained | $ 1000 |
| Total Equity of Shareholder | $3750 |
Hence the debt to equity ratio, in this example is: $15,000 / $ 3,750 = 4 times, or 400%
This means that in for every dollar, this company ABC owes $4 to creditors.
- Here is another example of debt to capital ratio:
In simple terms, the formula for debt to capital ratio is:Â Â Â Â Â Â Â Â Â Total-debt
Total-debt+equity
Now suppose the Company ABC has $500M of total assets. Short-term liabilities are $20 million and $40 million are the long term. Worth preferred stock is $15 million and additional $1M as the minority interest. The company has an outstanding share of $5 million at the current rate of $5 per share. Hence the debt to Capital ratio will be:
($20 million + $40 million)
($20 million + $40 million) +(15 million +1million + (5 x 5)) million
= 0.59 or 59%
If another company suppose Company DEF has the debt to capital ratio as 65%. For an investor/ bank Company, ABC will be preferred as its economic leverages are less than Company DEF.
To summarize this is the way a solvency ratios homework answer helps should have their explanations or illustrations. They must make sure that these kinds of examples are taken into consideration before providing any sort of help for your assignment that will help you fetch a good grade. Also, make sure that the help is plagiarism free so that they are unique in their explanations.