101 Concepts for the Level I Exam

Solvency refers to a company’s ability to meet its long-term debt obligations. In evaluating solvency:

- Leverage ratios focus on the balance sheet and measure the amount of debt financing relative to equity financing.

Leverage Ratio |
Numerator |
Denominator |

Debt to assets | Total debt | Total assets |

Debt to capital | Total debt | Total debt + shareholder’s equity |

Debt to equity | Total debt | Total shareholder’s equity |

Financial leverage | Average total assets | Average total equity |

- Coverage ratios focus on the income statement and cash flows and measure the ability of a company to cover its interest payments.

Coverage Ratio |
Numerator |
Denominator |

Interest coverage | EBIT | Interest payments |

Fixed charge coverage | EBIT + Lease payments | Interest payments +lease payments |