Solvency ratios
Examples include gearing and interest cover, but definitions and presentation vary by analyst and exam. Ratios are indicators, not proof of ability to pay: consider maturity dates, cash flows, financing terms and the stability of earnings as well as debt and equity balances. Distinguish longer-term solvency from short-term liquidity.
Worked example
If interest-bearing debt is $300,000 and equity is $200,000, debt divided by equity is 1.5 times. If the question instead defines gearing as debt divided by debt plus equity, it is 60%.
Common mistake
Comparing gearing percentages computed with different denominators, or concluding that one ratio alone proves the entity can meet all repayments.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | FR | Direct | September 2026–June 2027 |
| ACCA | SBR | Supporting | September 2026–June 2027 |