Solvency risk focuses on long-term structural survival, evaluating whether a firm’s total asset base can adequately cover its total structural liabilities.

Structural Vulnerabilities

  • Capital Deficits: Negative net worth or permanent equity depletion resulting from recurring net losses that destroy the balance sheet base.

 

  • Fixed-Charge Drags: High fixed costs (such as long-term lease debts and bond coupon payments) that lock the company into rigid cash outflow schedules.

 

  • Asset-Liability Duration Mismatch: Funding long-term, slow-yielding fixed infrastructure projects with volatile, short-term debt instruments.

 

Capital Structure Lever Ratios

  • Debt-to-Equity (D/E) Ratio:

    D/E = Total Debt / Total Shareholders’ Equity

 

  • Debt-to-Capital Ratio:

 

  • Debt-to-Capital = Total Debt / (Total Debt + Total Shareholders’ Equity)

 

  • Measures the proportion of a company’s total capital structure that is funded via debt.

 

Long-Term Viability Metrics

 

  • Fixed Charge Coverage Ratio (FCCR): Expands on interest coverage by incorporating non-discretionary fixed obligations like lease payments.

 

  • Free Cash Flow to Total Debt: Measures the percentage of total debt that could be retired in a single year using purely organic, unencumbered cash flows.

 

 

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