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Common solvency ratios explained
Page 42
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Solvency ratios measure how well your company can meet its short-term and longer-terrn f inancial obligations. Here are three of the more common and useful ratios...
The defensive interval
This is how long you could survive if you stopped earning today. Ideally it should be no less than 30 days.
Add together all your 'quick assets'. This refers to assets that can quickly be converted rito cash, typically: 4. Work in progress + Cash
Debtors
+ Stock
Divide this total by your daily operating expenses. The result is the number of days you could survive without income if you had to.
Gearing
This is your borrowing as a proportion of your asset base.
The equation is: total borrowing divided by equity multiplied by 100.
The answer should be read as a percentage and ideally shouldn't be higher than 50. A score of 50 means that for every pound you borrow you have two as assets.
Interest cover ratio
The equation is: profit (before interest and tax) divided by net interest payable. For example, if your prof it before interest and tax in one month is £16,000 and your interest payment is 24,000 then your interest cover is 4:1. A healthy company will achieve a figure of 4 or above; less than that and you could be seriously stretched.