Solvency ratio is also known as leverage ratio used to check the ability to repay long term liability of any company
Before investing money in any company, it is very important to know about its business, in which the first step is how much loan the company has, as we have already told you that there are two types of liabilities. In which the first one is short Term Liabilities and Other Long Term Liabilities
Difference between solvency and liquidity ratio
The liquidity ratio is used to check the short term liabilities of any company and the solvency ratio is used to check the long term liabilities. we should find out how much of the existing assets of the company has its own assets and how much has been financed by the loan when a company has more debt than equity Only then is the company liquidity crisis or solvency crisis occurs
Types of solvency ratio
In the solvency ratio is mainly considered as the only 2 ratio in which one is Debt to Equity Ratio and the other is Time Interest Earn Ratio but we will tell you the complete Solvency Ratio in detail so that you do not have any problem while doing fundamental analysis of a company.
- Debt ratio
- Equity ratio
- Debt to equity ratio
- Debt to assets ratio
- Debt to income ratio
- Debt service coverage ratio
- Cash flow to debt ratio
- Working capital to debt ratio
- Time interest earned ratio
Before knowing the solvency ratios, we get to know the financial terms associated with them, which will make it easier for us to understand the solvency ratio further.
Debt or Liabilities
When a company takes a loan from a financial institution for long term or short term to complete its day to day operations, it is called liabilities or loan eg electricity bills, room rents, wages, etc.
The portion of the company’s existing assets financed by promoters and public investors is called equity.
Cash flow is the nature of money coming and going to a person or company. Often people keep speaking it in colloquial language that money comes but does not stick in hand, it comes from here and goes there. Money is the scum of the hand. Money has got legs, they don’t stop. All these are kept in the cash flow category.
Cash flow is a financial term. It is basically a statement. In this statement, where is the money coming in the business/company or institution and where is the money going. How much money is coming and how much money is going. All these things are shown in a very easy way. Cash flow in business The action of the amount of money coming out at a certain time and the amount going out is called Cash Movement or Cash Flow. Types of money coming and going in business
Incoming cash flow
The money that comes to a company by selling products or services is called incoming cash flow.
Outgoing cash flow
Any amount spent in business is called outgoing cash. In this, the rate of interest on rent, business loan, and the amount given to repay any kind of borrowing is called outgoing cash.
There are 3 types of cash flow
Positive cash flow
When there is more profit in the business than expenses, it is called Positive Cash Flow.
Negative cash flow
When the business costs more and profits are less, then it is called Negative Cash Flow. It is very dangerous to have negative cash flow in any business / business. Negative cash flow means that only money is being invested in the business, not making profits. In such a situation business strategy needs attention. If a new machinery is needed, it should be purchased through a business loan but there should not be a negative cash flow of the business in any condition.
Break Even Cash Flow
When there is no loss in business nor profit is maintained on par, it is called Break Even Cash Flow. It is a matter of concern that there is no profit or loss in business. In such a situation, it is very important to pay attention to business strategies. Otherwise, when or if the situation turns into a loss, it cannot be said.
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