Essential Business Formulas - Solvency Ratios

Looking for Business Plan Software? Check out Business Plan Success

The solvency ratios measure business risk, which is you ability to pay your debts without any cash flow. Investors are very interested in these ratios because they indicate the amount of debt your company can handle. They also indicate the amount of investment you have in your company

Debt to Equity
The debt to equity ratio measures your net worth. If you debt to equity ratio is growing quickly, you need to decrease your liabilities before taking on more debt. You could also increase your retained earnings to reduce this ratio.

Formula: Debt to Equity: [Total Debt / Owner’s or Stockholder’s Equity]

Debt to Assets
This ratio will show you the percentage of your assets that are being financed by creditors (instead of the business owners). Generally, no more than 50% of your assets should be financed by debt. You can reduce this ratio by paying off debt or increasing the value of your assets.

Formula: Debt to Assets: [Total Debt / Total Assets]

Coverage of Fixed Costs
The coverage of fixed costs ratio shows you how easily you can pay your fixed costs. Fixed costs are costs that remain the same when sales increase or decrease. If you cannot pay your fixed costs, your business is in serious jeopardy.

Formula: Coverage of Fixed Costs: [{NBIT + Fixed Costs) / Fixed Costs]

Interest Coverage
This ratio measures your company’s ability to pay its interest charges. The higher the ratio, the better it is for the company.

Formula: Interest Coverage: [Operating Income / Interest Expense]

Business Plan Success automatically calculates the most common business ratios & formulas for analysis in your business plan.

Find out more about how Business Plan Success can create your business plan financial statements.

More Articles in this Category:

>> Learn how Business Plan Success can help you write a professional business plan.