For purposes of long-term solvency analysis the calculation of balance sheet ratios such as debt/equity or debt to total capital are of limited value and are used mostly as screening mechanisms to indicate whether further analysis is warranted.

Question

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Balance sheet ratios such as debt/equity or debt to total capital can provide a general idea about a company's leverage position, but long-term solvency analysis requires more in-depth analysis of a company's financial statements, cash flows, and operations. Therefore, these ratios are used as initial indicators to identify companies that may require further analysis to assess their long-term solvency.

For Purposes of Long-Term Solvency Analysis the Calculation of Balance