There are two firms: company A has a higher solvency ratio than company B. the liability to equity ratio and the current ratio of which company is higher, why?
D/E is higher for the company with higher solvency. D/E is a solvency ratio…it shows company’s ability to pay l/t debt. current ratio is a liquidity ratio.
since u say that COMP A has a higher solvency ratio, so they are more solvent that means have more current assets than comp B, hence, comp A will have a liability to equity ratio lower than comp B and will also have a current ratio higher than comp B…hope i am on the right track !?? please correct me if i am wrong…
I think comp A with the higher Current will have higher solvency and lower D/E. Higher D/E does not imply more solvent, at least to my underwriters. This is a leverage ratio, the higher it is the less solvent a company is.
BizBanker is correct. LOWER D/E implies greater solvency. Interest coverage ratio is the best solvency ratio, no?
For creditors yes interest coverage is most important in regards to lending and debt. That is my understanding.