101 Concepts for the Level I Exam
Concept 57: Leverage and Coverage Ratios
Solvency refers to a company’s ability to meet its long-term debt obligations. In evaluating solvency:
- Leverage ratios focus on the balance sheet and measure the amount of debt financing relative to equity financing.
|Debt to assets
|Debt to capital
||Total debt + shareholder’s equity
|Debt to equity
||Total shareholder’s equity
||Average total assets
||Average total equity
- Coverage ratios focus on the income statement and cash flows and measure the ability of a company to cover its interest payments.
|Fixed charge coverage
||EBIT + Lease payments
||Interest payments +lease payments