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A firm’s liquidity is measured by its capability to pay long term dues. These dues include principal amount payment on due date and interest payment on regular basis. Long term solvency of a firm can be determined by the following ratios:
a. Debt-Equity Ratio: This ratio shows the relationship between owner funds (equity) and borrowed funds (debt). A lower debt-equity ratio provides more security to the people who are lending to the business. It also shows that a company is able to meet long term dues or responsibilities.
b. Total Assets to Debt Ratio- It is based on the relationship between total assets and long term loans. It shows what percentage of company’s total assets are financed by creditors. A higher total assets to debt ratio makes the firm able to meet long term requirements and provides more security to lenders.
c. Interest Coverage Ratio: This ratio is used to determine the easiness with which a company is able to pay interest on the outstanding debts. It is calculated by dividing earnings before interest and taxes with interest payments. Having a higher interest coverage ratio means that company is able to meet its obligations skilfully.