Various Solvency Rations in Financial Analysis and Off-Balance Sheet Financing


Discussion Questions
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Discussion Questions
What are the various solvency ratios, what do they tell us, and are they helpful for financial analysis?
Solvency rations are used in measuring the ability of a business enterprise to finance its long term debt and in calculating the interest on such debt. As part of financial analysis, they help business owners to determine the sustainability of their enterprises. There a different types of solvency ratios. Total debt/total assets ratio measures how a company’s asset base is financed with the help of debt. The debt to equity ratio also known as total debt/total equity ratio encompasses both long term and short term debt. An increasing debt to equity ratio suggests increased expenses on interest and beyond a certain level may affect the firm’s crediting rating and by extension its ability to raise debt (Laeven & Majnoni, 2003). Other solvency ratios include time interests earned ratio, debt to capital/inventory ratio and fixed charge coverage ratio. All of these ratios are important in determining the possibility of bankruptcy of a firm in the long run or its future survival. What is Off-Balance Sheet Financing and why are we now taking a close look at the financia...