If TD = Total Debt, and TA = Total Assets, which of the following combinations represents a situation of LOW solvency?
A) High TD to EBITDA; High TA/TD
B) High TD to EBITDA; Low TA/TD
C) Low TD to EBITDA ; Low TA/TD
D) Low TD to EBITDA; High TA/TD

Question

Quizplus · Accepted Answer

A situation of low solvency means that a company has a high risk of not being able to meet its financial obligations, which is usually caused by a high level of debt relative to its assets and/or earnings. Therefore, a combination of high TD to EBITDA (indicating high leverage) and low TA/TD (indicating a low level of asset cushion) represents a situation of low solvency. Option B is the only choice that fits this criteria.