Questions:
The following numbers are pulled from the filings of a manufacturing company. All numbers are in millions of dollars.

| Year | Debt | Equity | 
|------|------|--------|
| 2021 | 3.5  | 10     |
| 2022 | 3.8  | 9      |
| 2023 | 4    | 8      |


Based solely on debt-to-equity, how has the solvency of the company increased or decreased in the past three years?

Below are the EBIT and Interest Expense values for the same company. Do these metrics indicate a similar trend in the company’s solvency over the years? All numbers are in millions of dollars.

| Year | EBIT | Interest Expense | 
|------|------|--------|
| 2021 | 2.0  | 0.25     |
| 2022 | 1.8  | 0.30      |
| 2023 | 1.6    | 0.35      |

Reference answers:
The solvency of a company can be approximated by calculating the ratio of debt to equity.

# 2023
 
Debt to equity = $4,000,000 / $8,000,000 = 0.5

# 2022

Debt to equity = $3,800,000 / $9,000,000 = 0.42

# 2021

Debt to equity = $3,500,000 / $10,000,000 = 0.35



The debt to equity of the company has increased in the past three years which means that it is using more debt compared to equity. This shows that it has become less solvent.

Below are the Interest Coverage Ratios for 2021-2023:

#2023
Interest Coverage = $1,600,000 / $350,000 = 4.57

#2022
Interest Coverage = $1,800,000 / $300,000 = 6.0

#2021
Interest Coverage = $2,000,000 / $250,000 = 8.0

The interest coverage ratio has decreased steadily over the past three years. Similar to the trend in the debt-to-equity ratio, this indicates that the company’s solvency has weakened