Explanation:
Solvency refers to a company's ability to meet its long-term debt obligations, which can be assessed using leverage and coverage ratios. Key observations from the data are:
Leverage Ratios:
Company 1 and Company 3 exhibit the lowest leverage ratios, indicating lower financial risk.
Interest Coverage Ratio:
Company 3 has the highest interest coverage ratio, reflecting its superior ability to cover interest payments.
Conclusion: While both Company 1 and Company 3 have low leverage ratios, Company 3's higher interest coverage ratio makes it the most solvent of the three.
An analyst evaluates the following financial data for three companies (in $ millions):
| Company | Total Assets | Total Debt | Total Equity | EBIT | Interest Payments |
|---|---|---|---|---|---|
| Company 1 | 100 | 20 | 80 | 8 | 4 |
| Company 2 | 200 | 50 | 150 | 10 | 4 |
| Company 3 | 400 | 80 | 320 | 12 | 4 |
Based on the provided data, which company demonstrates the highest solvency?
A
Company 1
B
Company 2
C
Company 3
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