CFAI Text EOC reading 20 Q#12

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sgupta0827

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I don’t know how solvency ratio could be negatively affected by write downs. My understanding is that when asset base and profit is reduced due to write down, equity will be reduced too. And with equity reduced, solvency ratios must be higher. Perhaps I don’t understand what is favorable for solvency ratios. Are the higher values favorable or lower values for solvency ratios?
 
Lower is better???
Let me qualify my question by stating that i haven’t done the aforementionded reading yet, but why would a lower solvency ratio be better. I would think higher means you are more solvent. Lower meaning you will likely struggle to cover obligations, no?
 
Debt to Asset or Debt to Equity, example of solvency ratios, though in isolation ratios are meaningless but generally less the debt to asset ratio (also equity) is, less risky is the business.
Negatively affected in a way that the ratios would increase which isn’t good. Because as compared to debt (which would be unaffected through write down), the write down would decrease both the assets (inventory) and the equity (loss) the ratio would move up which indicates risk as the debt level as a percentage of equity or asset would increase.
 
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