Leverage And Solvency Ratios

Front 1

Solvency

Back 1

A firm's ability to pay its noncurrent obligations as they come due and thus remain in business in the long run. The key ingredients of solvency are the firm's capital structure and degree of leverage.

Front 2

Capital Structure

Back 2

A firm's capital structure includes its sources of financing, both long- and short-term. These sources can be in the form of debt (external sources) or equity (internal sources). Debt is the creditor interest in the firm. Equity is the ownership interest in the firm.

Front 3

Leverage

Back 3

A firm's leverage is the relative amount of the fixed cost of capital, principally debt, in a firm's capital structure. Leverage creates financial risk, which relates directly to the question of the cost of capital. The more leverage, the higher the financial risk, and the higher the cost of debt capital.

Front 4

Operating Leverage

Back 4

Sales / EBIT
OR
%∆ EBIT / %∆ in Sales

Front 5

Financial Leverage

Back 5

EBIT / Net Income
OR
%∆ in Net income / %∆ in EBIT

Front 6

Capital Structure Ratios

Back 6

Report the relative proportions of debt and equity in a firm's capital structure

Front 7

Total-debt-to-total-capital Ratio

Back 7

Total debt / Total capital

Front 8

Debt-to-equity Ratio

Back 8

Total debt / Stockholders' equity

Front 9

Long-term debt-to-equity-capital Ratio (Debt to equity)

Back 9

Long-term debt / Stockholders' equity

Front 10

Debt-to-total-assets Ratio (Debt Ratio)

Back 10

Total liabilities/Total assets

Front 11

Earnings Coverage

Back 11

A creditor's best measure of a firm's ongoing ability to generate the earnings that will allow it to satisfy it's long-term debts and remain solvent.

Front 12

Times-interest-earned Ratio

Back 12

EBIT / Interest expense

An income statement approach to evaluation a firm's ongoing ability to meet the interest payments on its debt obligations.

Front 13

Earnings-to-fixed-charges Ratio (Fixed charge coverage ratio)

Back 13

Extends the times-interest-earned ratio to include the interest portion associated with long-term lease obligations

Front 14

Cash flow-to-fixed-charges Ratio

Back 14

Removes the difficulties of comparing amounts prepared on an accrual basis

Front 15

Activity Ratios

Back 15

Measure how quickly the 2 major noncash assets are converted to cash. They measure results over a period of time and thus draw information from the firm's income statement.

Front 16

Accounts Receivable Turnover

Back 16

Net credit sales / Average trade receivables (net)

Front 17

Inventory Turnover

Back 17

Cost of goods sold / Average inventory

Front 18

Accounts Payable Turnover

Back 18

Purchases / Average accounts payable

Front 19

Days sales outstanding in receivables (Average Collection period)

Back 19

Days in year / Accounts receivable turnover

Front 20

Days sales in inventory

Back 20

Days in year / Inventory turnover

Front 21

Days purchases in accounts payable

Back 21

Days in year / Accounts payable turnover

Front 22

Fixed Assets Turnover

Back 22

Net Sales / Average net fixed assets

Front 23

Total Assets Turnover

Back 23

Net Sales / Average total assets

Front 24

Operating Cycle

Back 24

The amount of time for a firm that passes between the acquisition of inventory and the collection of cash on the sale of that inventory.
Operating Cycle = Days sales in receivables + Days sales in inventory

Front 25

Cash Cycle

Back 25

The portion of the operating cycle that is not days purchases in accounts payable-the portion of the operating cycle when the company does not have cash, i.e., when cash is tied up in the form of inventory or A/R.
Cash cycle = Operating Cycle-Days purchases in payables