ANS (a) Solvency, or leverage,
ratios, judge the ability of a company to raise capital and pay its
obligations. Solvency ratios, which include debt to worth and working capital,
determine whether an entity is able to pay all of its debts. In practice,
bankers often include leverage ratios as debt covenants in contract agreements.
Bankers want to ensure the entity can maintain operations during difficult
financial periods.There are
different types of solvency ratios that you can use to track different elements
of your finances. Here are some of the most common types of solvency ratios
that companies track on a regular basis:

**Debt-to-Equity Ratio**

This ratio is a measure of total debt as
compared to shareholder equity. As an equation, you take your business’ total
liabilities and divide them by your shareholders’ equity .Whereas a general
high solvency ratio tends to indicate that a company is fiscally sound, a high
debt-to-equity ratio suggests that the company over-utilized debt to bankroll
its growth. As interest levels continue to climb, companies may suffer from
volatile earnings. To prevent insolvency, business owners must focus on
deferring costs, reducing debt and boosting overall profits. Another popular iteration of the
ratio is the Debt to Equity ratio which uses only long-term debt in
the numerator instead of total debt or total liabilities. Total debt includes
both long-term debt and short-term debt which is made up of actual short-term
debt that has actual short-term maturities and also the portion of long-term
debt that has become short-term in the current period because it is now nearing
maturity. This second classification of short-term debt is carved out of
long-term debt and is reclassified as a current liability called current portion of long-term debt (or
a similar name). The remaining long-term debt is used in the numerator of the
long-term-debt-to-equity ratio.

FORMULA

Debt/Equity
Ratio = Total Liabilities / Shareholders' Equity

Total Liabilities = Long Term
Liability + Current liabilities

Shareholders Equity= Equity share capital +
Preference share capital + Reserve&Surplus

**Total-Debt-to-Total-Assets Ratio**

This refers to the ratio of long-term and
short-term liabilities compared to total holdings. As an equation, it is
expressed as your business’ short- and long-term liabilities divided by its
total assets. As a company’s total-debt-to-total-assets ratio increases, it
poses a greater financial risk to banks and creditors.

When calculating
total-debt-to-total-assets, it’s important to take into account the degree of
leverage. While some liabilities, such as supplier costs and employee bonuses, may
be negotiable, companies with high total-debt-to-total-assets have higher
leverages and, as a result, lower flexibility. Because of this, businesses
should strive to raise the value of current assets or reduce their debt levels
moving forward.

Total-Debt-to-Total
Assets Ratio =

TOTAL
ASSETS = NON CURRENT ASSETS + CURRENT ASSETS

TOTAL
DEBT = NON CURRENT LIABILITY + CURRENT LIABILITY

**Interest-Coverage Ratios**

The interest
coverage ratio (ICR) is a measure of a company's ability to meet its
interest payments. Interest coverage ratio is equal to earnings
before interest and taxes (EBIT) for a time period, often one year, divided by
interest expenses for the same time period. The interest coverage ratio is a
measure of the number of times a company could make the interest payments on
its debt with its EBIT. It determines how easily a company can pay interest
expenses on outstanding debt.

Interest coverage ratio is also known as interest coverage, debt
service ratio or debt service coverage ratio

Typically, a company with an
interest-coverage ratio of 1.5 or less is viewed as financially unstable and
may struggle to Secure loan from banks and other
lenders. To boost your interest-coverage ratio, strive to reduce debt and boost
overall profits.

__FORMUL__

__A__

INTEREST COVERAGE RATIO
=

EBIT = EARNING BEFORE PAYMENT OF INTEREST ND TAX

INTEREST EXPENSE= INTEREST PAYMENT ON DEBENTURES + INTEREST
PAYMENT IN LOANS TAKEN

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