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Solvency Ratios: Debt-Equity and Coverage, ISC Class 12

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AccountsISC Class 12 · Ratio Analysis

Solvency Ratios: Debt to Equity, Proprietary, Debt to Total Assets and Interest Coverage

Updated 17 October 2026 · Draft, not yet fact-checked

Solvency ratios test the long-term financial stability of a company. Debt to Equity = Debt ÷ Shareholders' Funds, where Debt = Long-term Borrowings + Long-term Provisions. Proprietary Ratio = Shareholders' Funds ÷ Total Assets. Debt to Total Assets = Debt ÷ Total Assets. Interest Coverage = Net Profit before Interest and Tax ÷ Fixed interest charges on long-term borrowings.

Understand Solvency Ratios: Debt-Equity, Proprietary, Debt to Total Assets, Interest Coverage

What these ratios tell. Liquidity ratios look at the next twelve months; solvency ratios look at how a company is financed in the long run and whether it can service its debt. The ISC syllabus defines each term.

Debt (Long-term Debt) = Long-term Borrowings + Long-term Provisions.

Equity (Shareholders' Funds) = Share Capital + Reserves and Surplus. The syllabus gives equivalent routes from the assets side:

  • Non-Current Assets + (Current Assets − Current Liabilities) − Non-Current Liabilities; or
  • Non-Current Assets + Working Capital − Non-Current Liabilities; or
  • (PPE + Intangible Assets + Non-Current Investments + Long-term Loans and Advances) + Working Capital − (Long-term Borrowings + Long-term Provisions).

Total Assets = Non-Current Assets + Current Assets. In these ratios inventories include loose tools and spare parts.

1. Debt to Equity Ratio = Debt ÷ Equity. A lower figure means the company relies less on borrowed money. Written as x : 1.

2. Proprietary Ratio = Shareholders' Funds ÷ Total Assets. It shows what share of the assets belongs to the owners.

3. Debt to Total Assets Ratio = Debt ÷ Total Assets. It shows the share of the assets financed by long-term debt.

4. Interest Coverage Ratio = Net Profit before Interest and Tax ÷ Fixed Interest Charges. Fixed interest charges mean interest on long-term borrowings only. The answer is in times; a higher figure means a larger cushion.

Effect of transactions. The Debt-Equity Ratio is one of the three ratios the syllabus allows for effect-of-transaction problems. Issuing shares for cash raises equity; issuing debentures raises debt; redeeming debentures out of cash lowers debt; a transfer from surplus to reserves (or between reserves) leaves equity unchanged, and only retained profit, such as a profit credited to the Statement of Profit and Loss, raises equity.

Reading the ratios together. High Debt to Equity, low Proprietary Ratio and low Interest Coverage all point to the same risk: high borrowing relative to the owners' stake and earnings. Debt to Total Assets and the Proprietary Ratio are linked: where there are no current liabilities, they add to 1.

Solvency Ratios: Debt-Equity, Proprietary, Debt to Total Assets, Interest Coverage: key facts

Debt
Long-term Borrowings | Long-term Provisions
Syllabus definition.
Debt to Equity Ratio
Debt ÷ Equity (Shareholders' Funds) | expressed as x : 1
Lower is safer.
Proprietary Ratio
Shareholders' Funds ÷ Total Assets | expressed as x : 1
Total assets = Non-Current + Current Assets.
Debt to Total Assets Ratio
Debt ÷ Total Assets | expressed as x : 1
Same debt as above.
Interest Coverage Ratio
Net Profit before Interest and Tax ÷ Fixed Interest Charges | expressed in times
Interest on long-term borrowings only.

How to answer Solvency Ratios: Debt-Equity, Proprietary, Debt to Total Assets, Interest Coverage questions

Classify first, divide second.

  1. 1Pick out long-term borrowings and long-term provisions to get Debt.
  2. 2Add share capital and reserves and surplus to get Equity; check against the assets-side route if the question gives assets.
  3. 3Total all assets for the Proprietary and Debt to Total Assets ratios.
  4. 4For coverage, add back the interest to net profit before tax and divide by long-term interest only.
  5. 5State the ratio as x : 1, or in times for coverage.

Solvency Ratios: Debt-Equity, Proprietary, Debt to Total Assets, Interest Coverage in real life

The idea, met in an everyday situation. Answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

How much of the business is owned and how much is owed

Suppose a printing company has assets of ₹10,00,000. The owners' stake is ₹6,00,000, long-term loans are ₹3,00,000 and current liabilities are ₹1,00,000.

Find its debt to equity, proprietary and debt to total assets ratios.

Try it first, then show the solutionSolution
  1. Debt to equity = 3,00,000 ÷ 6,00,000 = 0.5 : 1.
  2. Proprietary ratio = 6,00,000 ÷ 10,00,000 = 0.6 : 1.
  3. Debt to total assets = 3,00,000 ÷ 10,00,000 = 0.3 : 1.

Answer: 0.5 : 1; 0.6 : 1; 0.3 : 1.

Memory hook: Owned over assets is proprietary; owed over assets is debt to assets.

Tricks to remember Solvency Ratios: Debt-Equity, Proprietary, Debt to Total Assets, Interest Coverage

Short memory aids. Say each one aloud once, then use it on a question the same day.

  • Debt = LT borrowings + LT provisions

    Only long-term items; current liabilities are not debt.

    Use it when: Numerator.

  • Equity two ways

    Capital plus reserves, or assets less outside liabilities.

    Use it when: Cross-check.

  • Coverage uses long-term interest

    Divide by interest on long-term borrowings only.

    Use it when: Denominator.

Solvency Ratios: Debt-Equity, Proprietary, Debt to Total Assets, Interest Coverage: solved examples

Ordered from board level to HOTS. Try each one before you open the solution.

Example 1: Direct application · 1 mark · MCQBoard level

Long-term borrowings are ₹3,00,000, long-term provisions nil, and shareholders' funds ₹6,00,000. The debt to equity ratio is:
(a) 2 : 1
(b) 0.5 : 1
(c) 1 : 1
(d) 0.33 : 1

Try it first, then show the solutionSolution
  1. Debt = ₹3,00,000; equity = ₹6,00,000.
  2. Ratio = 3,00,000 ÷ 6,00,000 = 0.5 : 1.

Answer: (b) 0.5 : 1

Example 2: Proprietary and debt to total assets · 3 marks · Short answerBoard level

Shareholders' funds are ₹8,00,000, long-term borrowings ₹3,00,000, long-term provisions ₹50,000 and total assets ₹12,00,000. Calculate the proprietary ratio and the debt to total assets ratio. (3 marks)

Try it first, then show the solutionSolution
  1. Proprietary ratio = 8,00,000 ÷ 12,00,000 = 0.67 : 1.
  2. Debt = 3,00,000 + 50,000 = ₹3,50,000.
  3. Debt to total assets = 3,50,000 ÷ 12,00,000 = 0.29 : 1.

Answer: Proprietary ratio 0.67 : 1; debt to total assets 0.29 : 1.

Example 3: Four solvency ratios from one Balance Sheet · 6 marks · Long answerHarder board level

From the following of Teal Ltd. calculate the debt to equity ratio, proprietary ratio, debt to total assets ratio and interest coverage ratio. Equity share capital ₹6,00,000; 10% preference share capital ₹2,00,000; General Reserve ₹1,50,000; Surplus ₹1,30,000; 12% Debentures ₹4,00,000; 9% long-term bank loan ₹2,00,000; long-term provisions ₹40,000; current liabilities ₹2,80,000. Total assets ₹20,00,000. Net profit before tax ₹2,40,000 after charging interest on debentures and the loan only. (6 marks)

Try it first, then show the solutionSolution
  1. Shareholders' funds = 6,00,000 + 2,00,000 + 1,50,000 + 1,30,000 = ₹10,80,000.
  2. Debt = 4,00,000 + 2,00,000 + 40,000 = ₹6,40,000. Check: 10,80,000 + 6,40,000 + 2,80,000 = ₹20,00,000.
  3. Debt to equity = 6,40,000 ÷ 10,80,000 = 0.59 : 1. Proprietary = 10,80,000 ÷ 20,00,000 = 0.54 : 1. Debt to total assets = 6,40,000 ÷ 20,00,000 = 0.32 : 1.
  4. Interest = 12% × 4,00,000 + 9% × 2,00,000 = 48,000 + 18,000 = ₹66,000.
  5. Net profit before interest and tax = 2,40,000 + 66,000 = ₹3,06,000; coverage = 3,06,000 ÷ 66,000 = 4.64 times.

Answer: Debt to equity 0.59 : 1; proprietary ratio 0.54 : 1; debt to total assets 0.32 : 1; interest coverage 4.64 times.

Example 4: Effect of transactions on debt to equity · 3 marks · Short answerHarder board level

Debt is ₹4,00,000 and equity ₹8,00,000, a ratio of 0.5 : 1. Find the ratio after each independent transaction: (i) equity shares issued for ₹1,00,000 cash; (ii) debentures of ₹80,000 redeemed out of cash; (iii) machinery bought with a long-term loan of ₹1,20,000. (3 marks)

Try it first, then show the solutionSolution
  1. (i) Debt 4,00,000; equity 9,00,000; ratio 0.44 : 1.
  2. (ii) Debt 3,20,000; equity 8,00,000; ratio 0.40 : 1.
  3. (iii) Debt 5,20,000; equity 8,00,000; ratio 0.65 : 1.

Answer: (i) 0.44 : 1; (ii) 0.40 : 1; (iii) 0.65 : 1.

Example 5: Reading coverage under pressure · 3 marks · Short answerHOTS / competency

Firm Q has interest on long-term borrowings of ₹1,00,000 and net profit before interest and tax of ₹1,50,000. Find its interest coverage ratio, the ratio if the profit before interest and tax falls by 20%, and the percentage fall that would leave it unable to cover the interest. (3 marks)

Try it first, then show the solutionSolution
  1. Coverage = 1,50,000 ÷ 1,00,000 = 1.5 times.
  2. After a 20% fall: 1,50,000 × 0.80 = 1,20,000; coverage = 1.20 times.
  3. Profit must stay at or above ₹1,00,000, so the largest safe fall is 50,000 ÷ 1,50,000 = 33.33%.

Answer: 1.5 times; 1.20 times after a 20% fall; any fall above 33.33% leaves interest uncovered.

Where students lose marks in Solvency Ratios: Debt-Equity, Proprietary, Debt to Total Assets, Interest Coverage

The slips examiners see most often, and what to write instead.

  • Mistake: Including current liabilities in debt

    Treating all outside liabilities as debt.

    Wrong working

    Debt = 6,40,000 + 2,80,000

    Right working

    Debt = 4,00,000 + 2,00,000 + 40,000 = 6,40,000

    Do this: Debt means long-term borrowings and long-term provisions.

    Usually costs: 2 marks.

  • Mistake: Interest coverage on net profit before tax

    Forgetting to add back the interest.

    Wrong working

    2,40,000 ÷ 66,000 = 3.64

    Right working

    3,06,000 ÷ 66,000 = 4.64

    Do this: Numerator is profit before interest and tax.

    Usually costs: 1-2 marks.

  • Mistake: Using current assets as total assets

    Ignoring non-current assets.

    Wrong working

    Proprietary ratio = 10,80,000 ÷ 8,00,000 (taking only current assets, assumed here to be ₹8,00,000, instead of total assets of ₹20,00,000)

    Right working

    10,80,000 ÷ 20,00,000

    Do this: Total assets = non-current + current assets.

    Usually costs: 1-2 marks.

  • Mistake: Writing coverage as a ratio x : 1

    Habit from the other ratios.

    Wrong working

    4.64 : 1

    Right working

    4.64 times

    Do this: Coverage is stated in times.

    Usually costs: Half mark.

Exam tips

  • Show Debt and Equity as working notes before dividing.
  • If equity is not given, compute it by the assets-side formula and say which you used.
  • Write the unit: x : 1 for balance sheet ratios, times for coverage.
  • Re-add the three groups (equity, debt, current liabilities) to check against total assets.

Practice questions on Solvency Ratios: Debt-Equity, Proprietary, Debt to Total Assets, Interest Coverage

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

  1. Q1 · 1 mark · MCQBoard level

    Long-term borrowings ₹5,00,000, long-term provisions ₹1,00,000, shareholders' funds ₹12,00,000. The debt to equity ratio is:
    (a) 0.5 : 1
    (b) 0.42 : 1
    (c) 2 : 1
    (d) 0.33 : 1

    Hint

    Debt is 6,00,000.

    Answer

    (a) 0.5 : 1

  2. Q2 · 3 marks · Short answerBoard level

    Shareholders' funds are ₹9,00,000, debt ₹3,75,000 and total assets ₹15,00,000. Find the proprietary ratio and debt to total assets ratio. (3 marks)

    Hint

    Divide each by 15,00,000.

    Answer

    Proprietary ratio 0.60 : 1; debt to total assets 0.25 : 1.

  3. Q3 · 3 marks · Short answerHarder board level

    Net profit before tax is ₹1,80,000 after charging interest of ₹36,000 on 12% debentures of ₹3,00,000 and ₹6,000 on a bank overdraft. Calculate the interest coverage ratio. (3 marks)

    Hint

    Fixed charges are long-term interest only.

    Answer

    Net profit before interest and tax = 1,80,000 + 36,000 + 6,000 = ₹2,22,000. Fixed interest = ₹36,000. Coverage = 6.17 times.

  4. Q4 · 6 marks · Long answerHarder board level

    Non-current assets are ₹14,00,000 (PPE ₹11,00,000 and non-current investments ₹3,00,000); current assets ₹6,00,000; current liabilities ₹3,00,000; long-term borrowings ₹4,00,000; long-term provisions ₹1,00,000. Find the equity by the assets-side formula, then the debt to equity, proprietary and debt to total assets ratios. (6 marks)

    Hint

    Equity = NCA + working capital − NCL.

    Answer

    Working capital = 3,00,000. Equity = 14,00,000 + 3,00,000 − 5,00,000 = ₹12,00,000. Debt = ₹5,00,000. Total assets = ₹20,00,000. Debt to equity 0.42 : 1; proprietary ratio 0.60 : 1; debt to total assets 0.25 : 1.

  5. Q5 · 3 marks · Short answerHOTS / competency

    A company has debt of ₹6,00,000 and equity of ₹4,00,000. It plans to issue equity shares for cash and use the whole proceeds to redeem debentures so that debt to equity becomes 1 : 1. How much should it raise? (3 marks)

    Hint

    Let the amount be x: (6,00,000 − x) = (4,00,000 + x).

    Answer

    6,00,000 − x = 4,00,000 + x, so x = ₹1,00,000. Check: 5,00,000 ÷ 5,00,000 = 1 : 1.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

  1. 1.Debt in the ISC syllabus?Show answer

    Long-term borrowings plus long-term provisions.

  2. 2.Proprietary ratio formula?Show answer

    Shareholders' funds ÷ total assets.

  3. 3.Interest coverage numerator?Show answer

    Net profit before interest and tax.

  4. 4.Is interest on a short-term loan in fixed interest charges?Show answer

    No; long-term borrowings only.

  5. 5.Does issuing equity shares raise or lower debt to equity?Show answer

    Lowers it.

Solvency Ratios: Debt-Equity, Proprietary, Debt to Total Assets, Interest Coverage: frequently asked questions

Are ideal values fixed in the syllabus?

No. Questions give targets or ask you to comment; interpret from the figures.

Is preference share capital debt or equity here?

The syllabus defines equity as share capital plus reserves and surplus, so preference share capital is within share capital.

What if the question gives equity and total assets but not debt?

Use Total Assets − Equity − Current Liabilities for debt, if no other non-current item exists.

Which ratios can be asked as effect of transactions?

Current ratio, quick ratio and debt-equity ratio only.