Solvency Ratios can be used to measure just that: solvency. Solvency is the measure of an organization's ability to 'survive' in the long run, to be able to meet it's long term obligations (debt) over time. A few key points on solvency include the following:
- Long-term creditors and stockholders are interested in a company's long-run solvency, particularly its ability to pay interest as it comes due and to repay the face value of debt at maturity.
- The debt to total assets ratio, the times interest earned ratio, and the cash debt coverage ratio provide information about debt-paying ability.
- In addition, free cash flow provides information about the company's solvency and its ability to pay additional dividends or invest in new projects.
Can anyone describe the ratios listed in these points? Why would these ratios be useful in strategic planning?