Solvency Ratios
Solvency ratio refers to a firm's ability to meet total
claims. A farm business is insolvent, in the final analysis, if
the sale of all assets fails to generate sufficient cash to pay
off all liabilities.
Debt/asset ratio—Farm business debt divided by farm
business assets, converted to a percent by multiplying by 100.
It measures debt pledged against farm business assets, indicating
overall financial risk.
Debt/equity ratio—Farm business debt divided by
farm business equity, converted to a percent by multiplying by
100. It measures the relative proportion of funds invested by
creditors (debt) and owners (equity).
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