Ratio Analysis
Valuations
Charting Technique
- Solvency denotes about the survivial of an entity over a long period
- Solvency depends upon ability to pay INTEREST and repay PRINCIPLE at the time of Debt maturity
- It denotes about the relationship between BORROWERS FUNDS To OWNER'S CAPITAL
- In Other words, it denotes what proportion of Equity & debt that the company utilized to Finance the Business
- Solvency states about the dependency of a firm on BORROWED FUNDS
- A ratio greater than 1: Denotes assets are mainly financed with Debt
- A ratio less than 1: Denotes assets are mainly financed with Equity
- It is more risky if the ratio is HIGH., as company has to pay high interest rates., when rates are in boom
- Denotes about the proportion of ASSETS., which are financed through DEBT
- If the ratio is < 1, most of the company's assets are financed through equity
- If the ratio is > 1, most of the company's assets are financed through debt
- Interest Coverage Ratio
- Debt Service Coverage Ratio
- It denots how many times that the company having the ability to pay INTEREST
- This ratio is yard stick to measure the potentiality of the company withrespect to Interest payment
- (OR) The interest coverage ratio measures the ability of a firm to meet its interest payments
- Interest Coverage Ratio is a Ratio between "Earnings before Interest and Tax", and Interest on "Long Term Loans\Debt".
Result:
- Lower Ratio denotes, more the company is burdened by debt expense
- Higher represents to: more secure for lender in respect of periodical interest payments
- An interest coverage ratio below 1.0 indicates the company unable to generate income to pay its interest
- coverage ratio with 6 - 7 times is apt
- Debt is a part of Liability.
Capital Structure\Solvency Ratio
Debt To Equity Ratio
Formula:
Interest Coverage Ratio:
Debt Asset Ratio
Note:
Companies with high debt/asset ratio becomes insolvent if creditors demanded to pay debt
Coverage Ratios
Interest Coverage Ratio
FAQ: WHAT IS THE DIFFERENCE BETWEEN DEBT AND LIABILITY?
