Picture this: a bank is deciding whether to give Rajesh & Co. Pvt. Ltd. a ₹5 crore term loan. They don't just care about this year's profit — they want to know if the company can survive long enough to repay. That's exactly what solvency ratios tell you: can this business meet its long-term obligations? These ratios are the lender's lens, and your job in the exam is to calculate and interpret them correctly.
The four solvency ratios you must know cold for May 2026 are:
1. Debt-Equity Ratio = Long-Term Debt ÷ Shareholders' Funds. A ratio of 2:1 means for every ₹2 borrowed long-term, shareholders have contributed ₹1. Lower is safer for lenders; higher means more financial risk. Banks typically prefer this below 2:1.
2. Total Debt to Total Assets Ratio (also called Debt Ratio) = Total Debt ÷ Total Assets. Shows what proportion of assets are financed by debt. A ratio of 0.6 means 60% of assets are funded by borrowings — risky territory.
3. Interest Coverage Ratio (ICR) = EBIT ÷ Interest Expense. This is the star of exam questions. EBIT = Earnings Before Interest & Tax = Net Profit + Interest + Tax. An ICR of 5x means profits can cover interest 5 times over. Below 2x is generally a red flag.
4. Proprietary Ratio = Shareholders' Funds ÷ Total Assets. The flip side of the Debt Ratio — shows what proportion of assets owners actually own. Higher = more solvent.
A critical distinction: liquidity ratios (Current Ratio, Quick Ratio) cover short-term survival; solvency ratios cover long-term survival. Don't mix them up in a question asking you to comment on 'long-term financial health.'
The interpretation always matters more than the number alone. A Debt-Equity Ratio of 3:1 might be perfectly fine for an infrastructure company (stable, long-term cash flows) but alarming for a trading firm. Always tie your answer to the nature of the business and industry norms — examiners love this nuance in 6-mark analysis questions.