Solvency ratio arises from debt to total assets. This is the link of total debt in excess of total assets. Solvency ratio, which is a relative amount, determines the proportion of total loan provided by creditors. This solvency ratio also supplies the required precise information about a company’s facility to survive losses without prejudice to creditors’ interest. Thus, when a company has small fraction of debt in relation to its overall assets, the company is seen to be at a vantage point and attractive to creditors considering the amount of shield prior to bankruptcy. Additionally, solvency ratio with small fraction of debt in relation to its overall assets apparently determines a company’s ability to get hold of extra sponsorships. The relationship is written as:
Solvency ratio = Debt to total assets = Total debt
Total assets
(Hunt, Weygandt, Kieso, and Kimmel, 2003).
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