Final answer:
Solvency ratios, such as debt to assets ratio and times interest earned ratio, measure a company's ability to survive over a long period of time. The debt to assets ratio divides total liabilities by total assets, indicating the proportion of assets financed by debt. The times interest earned ratio assesses a company's ability to cover its interest expenses.
Step-by-step explanation:
When measuring the ability of a company to survive over a long period of time, solvency ratios are commonly used. One such ratio is the debt to assets ratio, which is calculated by dividing total liabilities by total assets. Another solvency ratio is the times interest earned ratio, which is computed by dividing income before interest expense and income tax by interest expense.
For example, if a company has $1,000,000 in total liabilities and $2,000,000 in total assets, the debt to assets ratio would be 0.5. This indicates that half of the company's assets are financed by debt. On the other hand, the times interest earned ratio measures a company's ability to cover its interest expenses. If a company has an income before interest expense and income tax of $500,000 and an interest expense of $100,000, the times interest earned ratio would be 5. This means that the company's operating income is five times greater than its interest expense.