While short-term liquidity ratios (e.g., the current ratio) are used to assess a company's ability to pay bills coming due in the next 12 months, long-term solvency ratios are used to analyze a company's ability to service its debt (or cover lease payments, make capital expenditures, etc.) over the next several years.
Long-term solvency ratios include debt ratios and coverage ratios. Debt ratios tell you the extent to which the company is leveraged. For example, you might find that 70% of a company's assets are financed by long-term debt, or that the ratio of debt to equity is thirteen to one. More leverage implies more risk, as the company must make interest payments whether times are good or bad.
But just because a company is highly leveraged doesn't mean it will have difficulty servicing its debt. This is where coverage ratios come into play. The interest coverage ratio, for example, expresses EBIT (earnings before interest and taxes) as a multiple of interest expense; thus, an interest coverage ratio of 5 means the company could pay its interest 5 times using its profit. The higher the interest coverage ratio, the better positioned the company is for paying its interest.
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