Solvency ratios measure a company’s ability to meet its long-term obligations, while efficiency ratios show how well it uses its resources to run daily operations. Together, they help assess the business’s long-term stability and operational strength. 

“Solvency keeps the business alive long-term. Efficiency keeps it running smoothly every day.”

The debt-to-equity ratio is calculated using the formula: Total Liabilities ÷ Shareholders' Equity. This solvency ratio indicates how much debt a company is using to finance its assets in comparison to the owner’s investment. A higher debt-to-equity ratio suggests that the business relies more on borrowed funds than on owner financing. While this can help accelerate growth, it also increases financial risk—especially during economic downturns—since the company must continue repaying its debts regardless of profits.

The interest coverage ratio is calculated using the formula: EBIT ÷ Interest Expense, where EBIT stands for Earnings Before Interest and Taxes. This ratio measures how easily a company can cover its interest payments on outstanding debt using its operating income. A higher interest coverage ratio means the business has a stronger ability to meet its interest obligations comfortably, which is a positive sign for lenders and investors. On the other hand, a low ratio could indicate financial stress and a higher risk of default.

The inventory turnover ratio is calculated using the formula: Cost of Goods Sold ÷ Average Inventory. This efficiency ratio measures how quickly a business sells and replaces its inventory over a specific period. A higher inventory turnover indicates that products are selling quickly, which is often a sign of strong customer demand or effective inventory management. On the other hand, a low turnover may suggest overstocking, slow-moving goods, or weak sales performance.

The receivables turnover ratio is calculated using the formula: Net Credit Sales ÷ Average Accounts Receivable. This ratio shows how many times a business is able to collect payments from its customers during a given period. A high receivables turnover means the company is collecting money quickly and managing its credit sales effectively, which is important for maintaining healthy cash flow. A lower ratio, on the other hand, may indicate collection delays or issues with customer payments.

✅ Solvency ratios assess long-term financial health and debt levels
✅ Efficiency ratios track how well a business uses its assets
✅ Debt-to-Equity shows reliance on borrowed funds
✅ Interest Coverage measures ability to repay debt interest
✅ Turnover ratios show how quickly inventory or receivables are converted into cash