Solvency and leverage ratios measure how well a company is able to meet it’s long-term debt commitments. In this section, we cover the most important solvency ratios you need to know.
What are coverage ratios?
When you invest in companies or analyse them for others to invest in you need to be able to separate companies with a healthy and manageable amount of debt from companies that are overextending themselves.
Leverage from debt is very useful for businesses to finance their operations, but businesses that are too highly leveraged are at risk of not being able to cover their debts and may be forced to sell assets or, in extreme cases, declare bankruptcy,
Coverage ratios are a useful way that you can measure these risks to determine and decide whether a company has the ability to pay its existing debts.
List of coverage ratios
Below is the complete list of coverage ratios we have covered. Each will provide a detailed overview of the ratio, what it’s used for, and why.
They also explain the formula behind the ratio and provide examples and analysis to help you understand them.
- Debt Service Coverage Ratio
- Cash Flow Coverage Ratio
- Asset Coverage Ratio
- Interest Coverage Ratio
- Preferred Dividend Coverage Ratio
- Debt to Capital Ratio
- Debt to Income Ratio (DTI)
- Fixed Charge Coverage Ratio
- Cash Flow to Debt Ratio
