If after-tax net operating income is 120,000 and total debt obligations are 600,000, what is the solvency ratio?

If after-tax net operating income is 120,000 and total debt obligations are 600,000, what is the solvency ratio?

• A. 0.15
• B. 0.25
• C. 0.10
• D. 0.20

Answer: (D)

Solvency is about how much income is available to meet debt obligations. It’s calculated by dividing after-tax net operating income by total debt obligations. In this case, 120,000 divided by 600,000 equals 0.2, or 20%. That means there are 20 cents of after-tax NOI for every dollar of debt obligations. A higher ratio indicates a stronger ability to cover debt, so this result shows a moderate level of solvency.

Solvency is about how much income is available to meet debt obligations. It’s calculated by dividing after-tax net operating income by total debt obligations. In this case, 120,000 divided by 600,000 equals 0.2, or 20%. That means there are 20 cents of after-tax NOI for every dollar of debt obligations. A higher ratio indicates a stronger ability to cover debt, so this result shows a moderate level of solvency.