Which of the following cash flow ratios is used to determine an entity’s solvency?Debt coverage ratio.Cash adequacy ratio.Free cash flow ratio.Cash flow ratio.
Question
Which of the following cash flow ratios is used to determine an entity’s solvency?Debt coverage ratio.Cash adequacy ratio.Free cash flow ratio.Cash flow ratio.
Solution
The Debt Coverage Ratio is used to determine an entity's solvency.
The Debt Coverage Ratio, also known as the Debt Service Coverage Ratio, measures a company's ability to repay its debts by comparing its net operating income with its total debt service (the total amount of money required over a given period for the repayment of debts). A higher ratio indicates a better ability to cover debt obligations and therefore a higher level of solvency.
The other ratios mentioned - Cash Adequacy Ratio, Free Cash Flow Ratio, and Cash Flow Ratio - are also useful for analyzing a company's financial health, but they are not specifically used to determine solvency.
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