AMP 415 Module 3 DQ 2

I would next consider Solvency Ratios. These are:

Debt to equity = Total debt / Total equity

This ratio indicates the degree of financial leverage being used by the business and includes both short-term and long-term debt. A rising debt-to-equity ratio implies higher interest expensies, and beyond a certain point it may affect a company’s credit rating, making it more expensive to raise more debt.

Debt to assets = Total debt / Total assets

Another leverage measure, this ratio measures the percentage of a company’s assets that have been financed with debt (short-term and long-term). A higher ratio indicates a greater degree of leverage, and consequently, financial risk.

Interest coverage ratio = Operating income (or EBIT) / Interest expense

This ratio measures the company’s ability to meet the interest expense on its debt with its operating income , which is equivalent to its earnings before interest and taxes (EBIT). The higher the ratio, the better the company’s ability to cover its interest expense.

These ratios futher help out the process to see where the company completely lies financially and will help in the final assestment in the paying liability.

http://www.investopedia.com/articles/investing/101613/analyzing-investments-solvency-ratios.asp