Ministry of Higher and Secondary Special Education of the Republic of Uzbekistan Tashkent State University of Economics

Analysis of solvency ratios of two companies.

Following is a list of key Solvency ratios, followed by a numerical example:
1.Long-Term Debt- to- Equity Ratio
This solvency ratio method determines the amount of long-term debt a company has taken on in relation to its equity and aids in determining the company's leverage. Here Debt over a Long Period of Time
Debentures, for example, are long-term loans.
Equity refers to Shareholders' Funds, which include Equity Share Capital, Preference Share Capital, and Reserves in the form of Retained Earnings, as well as Long-Term Loans acquired from Financial Institutions.
The Ratio can also be used to determine how much Long-term debt a company has taken on in comparison to its equity contribution.
Solvency Ratio Formula:
Long Term Debt to Equity Ratio= Long Term Debt/ Total Equity¹²
2.Total Debt- to- Equity Ratio
This solvency ratio formula is used to calculate the amount of overall debt (which includes both short-term and long-term debt) a company has taken on in relation to its equity, as well as the total leverage of the company. The Ratio can be used to determine how much of a company's funding comes from debt vs equity contributions. In a nutshell, the higher the ratio, the higher the leverage, and the greater the risk of the organization having a large debt obligation (in the form of Interest and Principal Payments).
Solvency Ratio Formula:
Total Debt to Equity Ratio= Total Debt/ Total Equity¹³
3.Debt Ratio
This ratio is used to measure the percentage of a company's total assets (which includes both current and non-current assets) that are financed by debt, and it aids in determining the company's total leverage. The higher the ratio, the higher the leverage and the greater the financial risk associated with the business's substantial debt obligation (in the form of Interest and Principal Payments).
Solvency Ratio Formula:
Debt Ratio= Total Debt/ Total Assets¹⁴
4.Financial Leverage
The impact of all obligations, both interest-bearing and non-interest-bearing, is captured by the Financial Leverage ratio. This ratio is used to evaluate how much of the company's assets belong to the shareholders rather than the creditors or debt holders. As a result, if Equity Shareholders fund the majority of the assets, the business will be less leveraged than if Debt funds the majority of the assets (in that case, the business will be more leveraged). The higher the ratio, the higher the leverage and the greater the financial risk associated with a large debt obligation used to finance the company's assets.
Solvency Ratio Formula:
Financial Leverage= Total Assets/ Total Equity¹⁵
5.Proprietary Ratio
This ratio establishes the relationship between the funds of the shareholders and the company's total assets. It shows how much of the money from the shareholders has gone into the company's assets. The higher the ratio, the lower the leverage and, consequently, the lower the financial risk to the company. It can also be determined by subtracting the Financial Leverage Ratio from the Financial Leverage Ratio.
Solvency Ratio Formula:
Proprietary Ratio= Total Equity/ Total Assets¹⁶

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