What Is a Solvency Ratio?

The ratio between corporate borrowing costs and solvency in Western financial accounting. There are mainly interest payment ratios and cash flow payment ratios. The focus of the repayment ratio is the income statement, which measures the adequacy of income to be paid when interest and other fixed expenses are due. Two popular repayment ratios are the interest rate repayment ratio and the fixed fee repayment ratio.

Repayment ratio

Right!

The ratio between corporate borrowing costs and solvency in Western financial accounting. There are mainly interest payment ratios and cash flow payment ratios. The focus of the repayment ratio is the income statement, which measures the adequacy of income to be paid when interest and other fixed expenses are due. Two popular repayment ratios are the interest rate repayment ratio and the fixed fee repayment ratio.

Chinese name

Repayment ratio

Foreign name

coverage ratios

The interest repayment ratio refers to the ratio of the sum of interest expenses, profit before taxation and the amount of interest expenditures of a certain period of time. Its calculation formula is:

Interest repayment ratio = operating profit before tax ÷ interest

This ratio indicates the ability of a company to pay interest on borrowings from the proceeds of its operations.

Cash flow repayment ratio refers to the ratio of corporate cash flow to the principal and interest payments of borrowings. Its calculation formula is:

In the formula, t is the income tax rate. Because the principal is paid after tax, this amount needs to be adjusted by 1 / (1- t ) to make it consistent with the interest paid before tax. This ratio shows the ability of a company to pay interest and principal in cash. A high ratio indicates that the company's solvency is strong, otherwise it indicates that the company's solvency is poor.

The ratio that bank lenders often consider when deciding whether to issue a loan.

Debt principal repayment ratio = annual profit after tax ÷ (debt principal ÷ debt life)

The indicator must be greater than 1, the higher the indicator, the stronger the company's solvency. Judging from the debt principal repayment ratio of a company in a certain period, it is difficult to explain the quality of the company's debt repayment ability. For an enterprise, it is often necessary to calculate the debt principal repayment ratio for five consecutive fiscal years in order to determine the stability of its solvency. When estimating the long-term solvency of the company from a stable perspective, it is usually the year in which the lowest indicator is selected.