Corporate Accounting

Meaning and Types of Solvency Ratios

Solvency ratios reveal the capital sources and leverage of the firm. A solvency ratio measures the extent to which assets cover commitments for future payments, the liabilities.

The solvency ratio of an insurance company is the size of its capital relative to all risks it has taken. It is important to know the debt, equity and surplus funding for the operations of the firm.

Payout Ratio

It is the amount paid out to the shareholders in the form of dividends. The remaining amount is the profit retained by the company.

Debt Ratio

This represents the long-term debt component in the total capital employed by the company. This shows the total leverage of the company, thereby evaluating the scope of the company to take tax benefit.

Equity Ratio

This represents the total debt to total equity of the company. It shows the debt to equity ratio and is recommended to be more than 1.

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[…] in coming time. This is the test of long term solvency rather than short-term which we cover under liquidity ratios. Loans are usually taken for a longer duration. Hence, the assessment of long term repayment […]

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