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Solvency Ratios Video Lecture | Accountancy Class 12 - Commerce

49 videos|111 docs|56 tests

FAQs on Solvency Ratios Video Lecture - Accountancy Class 12 - Commerce

1. What are solvency ratios in commerce?
Solvency ratios in commerce are financial metrics used to evaluate a company's ability to meet its long-term obligations and remain solvent. These ratios measure the company's ability to generate enough cash flow to cover its debt payments and other financial obligations.
2. How are solvency ratios calculated?
There are several solvency ratios used in commerce, including the debt-to-equity ratio, debt ratio, and interest coverage ratio. The debt-to-equity ratio is calculated by dividing the company's total debt by its total equity. The debt ratio is calculated by dividing the company's total debt by its total assets. The interest coverage ratio is calculated by dividing the company's earnings before interest and taxes (EBIT) by its interest expenses.
3. What do solvency ratios indicate about a company's financial health?
Solvency ratios provide insights into a company's ability to meet its long-term financial obligations. A high solvency ratio indicates that the company has a strong financial position and is capable of repaying its debts. On the other hand, a low solvency ratio suggests that the company may face difficulties in meeting its debt obligations and may be at risk of insolvency.
4. How do solvency ratios differ from liquidity ratios?
Solvency ratios and liquidity ratios both assess a company's financial health, but they focus on different aspects. Solvency ratios measure a company's ability to meet long-term obligations, whereas liquidity ratios evaluate a company's ability to meet short-term obligations. Solvency ratios consider the company's overall financial stability, while liquidity ratios assess the availability of cash and other liquid assets to cover immediate expenses.
5. What are some limitations of solvency ratios?
While solvency ratios provide valuable insights into a company's financial health, they have some limitations. One limitation is that solvency ratios are historical measures and may not accurately reflect a company's current financial position. Additionally, solvency ratios do not consider qualitative factors such as management's ability to make informed financial decisions. Lastly, different industries may have varying ideal solvency ratios, so it's important to consider industry benchmarks when interpreting these ratios.
49 videos|111 docs|56 tests

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