I came across a question from Schweser Q-Bank that confused me a bit and I’m hoping I’m just not using the right terminology:
In this question we’re asked to make some adjustments. Debt is unchanged, but Equity decreases (Compared to a company that uses straight line depreciation, a company that uses accelerated depreciation is most likely to have)
It then gives an explination in it’s answer: The lower income will reduce reported equity (hence lower solvency ratios)
Now, I would consider Debt / Equity a solvency ratio, is this correct? If so, wouldn’t lower equity increase this solvency ratio mathematically? When they refer to lower solvency ratio, do they actually mean the company is less solvent and therefore would have a higher debt to equity ratio?
Just a bit confused and want to make sure I’m thinking clearly here