Solvency ratios focus on a company’s ability to meet its long term obligations such as debt. The amount and type of debt a company holds will influence their future risk and return. This measure is known as leverage and there are 2 kinds. Operating leverage comes from fixed costs like building rent and financial leverage arises from financing costs like interest expenses.
A commonly used measure is the debt-capital ratio which measures what percentage of a company’s total capital is financed by debt.
Debt-to-Capital Ratio = Total DebtTotal Debt + Shareholder's Equity
On the financial leverage side, the interest coverage ratio (aka Times Earned Ratio) represents how many times earnings before interest and taxes (EBIT) can cover the interest payments.
Interest Coverage = EBIT/Interest Payment