Solvency ratios measure a company's ability to satisfy its long-term obligations. They provide information relating to the relative amount of debt in a company's capital structure. Moreover, they reveal the adequacy of a company's earnings and cash flow to cover interest expenses and other fixed charges as they fall due.

There are two types of solvency ratios: (i) debt ratios, which focus on the balance sheet and measure the amount of debt capital relative to equity capital; and (ii) coverage ratios, which focus on the income statement and measure the ability of a company to cover its debt payments. Both sets of ratios are useful in assessing a company's solvency and evaluating the quality of its bonds and other debt obligations.

Below is a list of the most commonly used solvency ratios:

Debt-to-Assets Ratio: total debt/total assets

Interpretation: this measures the percentage of a company's total assets that are financed with debt. A higher ratio implies higher financial risk and weaker solvency.

Debt-to-Capital Ratio: total debt/(total debt + total shareholders' equity)

Interpretation: this measures the percentage of a company's capital (debt + equity) that is represented by debt. A higher ratio implies higher financial risk and weaker solvency.

Debt-to-Equity Ratio: total debt/total shareholders' equity

Interpretation: this measures the amount of debt capital relative to equity capital. A higher ratio implies higher financial risk and weaker solvency.

Financial Leverage Ratio: average total assets/average total equity

Interpretation: this measures the number of total assets that are supported for each one money unit of equity. The higher the ratio, the more leveraged the company in its use of debt and other liabilities to finance assets.

Interest Coverage Ratio: EBIT/interest payments

Interpretation: this measures the number of times that a company's EBIT could cover its interest payments. A higher ratio indicates stronger solvency.

Fixed-charge Coverage Ratio: (EBIT + lease payments)/(interest payments + lease payments)

Interpretation: this measures the number of times a company's earnings (before interest, taxes, and lease payments) can cover its interest and lease payments. A higher ratio indicates stronger solvency.