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Solvency Ratio

Solvency Ratio

Total Assets to Debt Ratio

Proprietary Ratio

Interest Coverage

Ratio

Debt Equity Ratio

Meaning It indicates the proportion of funds which are acquired by

long term borrowings in comparison to shareholder’s

funds

Formula Debt/Equity or long term Debts/Shareholder’s Funds or

Net worth

Long Term

Debts

includes long term borrowings and long term provisions

which mature after one year.

Shareholder’

s Funds

Includes Equity share capital and preference share

capital and reserves& surplus

Reserve&

Surplus

Include capital Reserve, Security Premium, General

Reserve and Balance in Statement of Profit &Loss

Significance 2:1

Debt Equity Ratio

Introduction In this ratio total assets are expressed in relation to

long-term debts. It is usually expressed as pure

ratio

Formula Total Assets/ Debts or Long term Debts

Total Assets Non-current Assets (tangible Assets+ Intangible

Assets+ Non-Current Investments+ Long Term Loans

& Advances)+ Current Assets

Debt Long Term Borrowings + Long Term Provision

Significance 1:1 or 2:1(margin of safety available to providers of

long term loans.

Total Assets to Debt

Ratio

Introduction

It indicates the proportion of total assets funded by

owners or shareholders.

Formula Equity/Total Assets or Shareholder’s funds/Total

Assets

Total Assets Discussed earlier

Equity Discussed Earlier

Significance depends upon business, generally higher

percentage shows sound business position

Proprietary Ratio

Introductio

n

Also termed as ‘Debt Service Ratio’. Calculated by dividing the ‘profit before charging interest and

income tax by Fixed interest charges

Formula

PBIT/Fixed interest charges

PBIT Profit Before Interest and Income Tax

Fixed interest

charges

It includes interest on long term loans and debentures

Significance 6 to 7 times is considered appropriate

Interest Coverage Ratio

Test Your Knowledge

Debt equity ratio of company is 2:1.state the effect of the

following transactions on this ratio.

Issue of preference shares

By Back of its own shares by company

Issue of Debentures

Repayment of Bank loan

Sale of Fixed assets at par

Sale of fixed assets at a profit

Sale of fixed assets at loss

Purchase of fixed assets on log term deferred payment

Basis

Purchase of fixed assets on a credit of 3 months