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Ratio Analysis Part-3

Long Term Solvency Ratios / Measures

Long term solvency Ratios measures the firm's ability to meet its long term obligations or leverage ability. Following Ratios are used to measure long term solvency ability of any organization / firm.
  1. Total Debt Ratio
  2. Debt to Equity Ratio
  3. Time Interest earned Ratio
  4. Cash Coverage Ratio

The Debt Ratio: The amount of debt shows the money of other people invested in the firm for generating profit, these people are called Creditors. They are concerned with long term solvency ability of a firm because this ratio or measures show the stream of payment over the long period of time because credit's claims must be satisfied before distribution of profit / earning to shareholders. Formula for calculating Total Debt Ratios is as under:
Total Debt Ratio = Total Assets - Total Liabilities / Total Assets
The firm has higher  the debt ratio ratio, the greater the firm’s degree of indebtedness and the more financial leverage.
Debt–Equity ratio = Total Debt / Total Equity
Times Interest Earned RatioThe times interest earned ratio, also called the interest coverage ratio, measures the firm’s ability to make contractual interest payments. . The times interest earned ratio is calculated as follows:
Times interest earned ratio = Earnings before interest and taxes / Interest
A value of at least 3.0—and preferably closer to 5.0—is often suggested  The higher its value, the better able the firm is to fulfill its interest obligations.
Cash Coverage Ratio  =             EBIT + Depreciation / Interest. 

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