Solvency Ratios and Their Resolutions
A healthy company is a company that is able to measure various important factors that are the foundation of the company’s business, starting from the company’s profitability to the level of employee welfare. All of these measures determine whether the company’s business development is on the right track or not.
Many people assume that the main characteristic of a healthy company is the magnitude of the business benefits gained by the company. In fact, there is one other factor that is no less important than the company’s profitability, namely the company’s ability to manage its assets as well as pay for any corporate debt. Debt and profits from the company must be in a bargaining position so that the company’s business can be guaranteed continuity.
For debt management, accounting practices in companies are familiar with the term solvency. Solvency is the ability of a company to fulfill all its obligations. Solvency also means showing the company’s ability to pay off all existing debt by using all of its assets.
The solvency ratio is also called the leverage ratio, which measures the ratio of funds provided by the owner to the funds borrowed from the company’s creditors. This ratio is intended to measure to what extent the company’s assets are financed by debt. This ratio shows an indication of the level of security of the lenders (banks).
a. Debt to Asset Ratio (Total Debt to Asset Ratio)
This ratio measures how much the company’s assets are financed by debt or how much the company’s debt affects the management of assets or measures the percentage of how much funds come from debt.
Debt here is corporate debt, both long-term and short-term debt. The formula used to calculate this ratio is:
This ratio illustrates how far debt can be covered by assets. The lower the discharge ratio, the better the security level of funds.
b. Debt to Equity Ratio (Total Debt to Equity Ratio)
This ratio is used to find out the relationship between long-term debt with the amount of own capital that has been provided by the owner of the company, with the intention to find out how much funds are provided by creditors with the company’s owners.
If the higher the ratio, the smaller the equity capital compared to the debt. Company policy should have a debt that is not greater than the capital it has. Because the smaller this ratio will improve the state of the company, meaning that the smaller the debt held, the safer. The formula used is:
How to Calculate the Company’s Solvency Ratio
Net Cash Flow Operating Activities
* taken from the cash flow statement
Company Solvency Ratio Lestari Abadi
Knowing the company’s solvency ratio is important to know the extent to which the company has the ability to pay off or repay all loans through the number of assets held.
Solvency calculations for each company will be easier if we have a good accounting system. Journal of online accounting software, is a service provider of accounting services that has financial reporting, cost, and asset management features that can be used to make it easier for you to know the level of company solvency.