Solvency

Solvency refers to a firm's ability to meet long-term obligations based on its overall debt level and earnings capacity.

It is measured by debt-to-total assets ratio and time interest earned.

Debt-to-Total assets

Total Liabilities / Total Assets

Percentage of the firm's assets supported by debt financing.

Time Interest Earned

EBIT / Interest Charges

This refers to the interest coverage ratio i.e. the ratio of how much earnings to cover interest payments. It indicates a firm's ability to cover its interest payments using its operating income, showing how many times over the firm can pay its interest obligations.