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# Solvency Ratios - Test of Long Term Solvency:

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 The long-term financial soundness of any business can be judged by its long-term creditors by testing its ability to pay interest charges regularly and its ability to repay the principal as per schedule.Thus long-term financial soundness (or solvency) of any business is examined by calculating ratios popularly, known as leverage of capital structure ratios. These ratios help us the interpreting repay long-term debt as per installments stipulated in the contract. Following are the most important solvency ratios: Debt-Equity ratio: (also known as debt to net worth ratio). The relationship between borrowed funds and internal owner's funds is measured by Debt-Equity ratio. Read more about debt equity ratio.   Debt Service or Interest Coverage Ratio: The ratio measures debts servicing capacity of a business so far as interest on long-term loans is concerned. The ratio is calculated with formula. Read more about debt service ratio.   Debts to Total Funds or Solvency Ratio: Solvency is the term which is used to describe the financial position of any business which is capable to meet outside obligations in full out of its own assets. So this ratio establishes relationship between total liabilities and total assets. Read more about debts to total ratio.   Reserves to Capital Ratio: This ratio establishes relationship between reserves and capital. Read more about reserves to capital ratio.   Capital Gearing Ratio: It is the ratio between the capital plus reserves i.e. equity and fixed cost bearing securities. Fixed cost bearing securities include debentures, long-term mortgage loans etc. Read more about capital gearing ratio.   Proprietary Ratio: Proprietary ratio (also known as Equity Ratio or Net worth to total assets or shareholder equity to total equity). Read more about proprietary ratio.
More study material from this to

## More study material from this topic:

 Meanings, Nature and Usefulness of Ratios Analysis Interpretation of Ratios Important Factors for Understanding Ratios Analysis Significance and Usefulness Ratios Analysis Classification of Ratios Analysis of Short Term Financial Position or Test of Liquidity Current Ratio Quick/Acid Test/Liquid Ratio Absolute Liquid Ratio Inventory/Stock Turnover Ratio Debtors / Receivable Turnover Ratio Creditors / Payables Turnover Ratio Working Capital Turnover Ratio Profitability Ratios Gross Profit Ratio (GP Ratio) Operating Profit Ratio Net profit ratio (NP ratio) Earnings Per Share Ratio Operating ratio Expense ratio Solvency ratios - Test of Long Term Solvency Debt-equity Ratio Debt Service Ratio or Interest Coverage Ratio Fixed Assets Ratio Debts to Total Funds or Solvency Ratio Reserves to Capital Ratio Capital Gearing Ratio Proprietary Ratio Accounting Ratios Formulas Limitations of Ratios Analysis

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