Measuring solvency, explained by our small business accountant in Sydney
Our small business accountant in Sydney defines solvency as the ability of a business to meet its long-term financial obligations. When talking about long term, this means a period that is greater than 12 months. Small business accountants in Zetland measure solvency using 3 main ratios: debts to assets ratio, debt to equity ratio and the times interest earned ratio.
Debt to assets ratio
The debt to assets ratio compares a business's total liabilities to its total assets and yields the percentage of assets provided by creditors. An insight used by small business accounting in Sydney is that a decreasing ratio shows that a company is taking on a less risky capital structure.
Debt to equity
This ratio compares a business’s total liabilities to its total equity. A higher debt to equity ratio identifies a riskier capital structure. A riskier capital structure also means a greater risk of insolvency.
Times interest earned
This involves comparing a business’s profits to its interest expense. From this ratio you will be able to tell how easily interest can be paid out of profits.
For more information on how to measure solvency, please contact our small business accountant in Sydney today.