What are Solvency Ratios?
They help in determining whether company will be able to repay its long term debts.
Hence it helps in finding out whether company will be able to survive over a long period of time
Important Solvency Ratios
|
S.no. |
Ratio Name |
Formula |
Ideal Ratio |
What is better |
Remarks |
|
1 |
Debt equity Ratio |
Long term Debts / Equity |
Max 2.5:1, Ideal 1:1 |
Lower the better |
Debts=Long Term Loan
Equity=Capital+Reserves |
|
2 |
Debt to Total Funds |
Long term Debts / Long term loans + share holders fund |
Max 2.5:(2.5+1),
Ideal 1:(1+1) |
Lower the better |
Debts=Long Term Loans Equity=Capital+Reserves.. Total Fund=Debt+ Equity |
What is Capital Structure of a Business?
View answer
Suppose a Person Starts a Business with Investment of 20 lacs Capital .e also takes 30 lacs long term loan from Bank and 10 lac Short Term Bank OD
In this case,Capital Structure is Long Term Funds Only i.e. 20+30=50 lacs out of which 20 lacs is Equity and 30 lacs is Debt
It can be said that Debt Equity Ratio of Capital Structure =Debt/Equity=30/20=3/2