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Solvent

A company or individual is considered solvent when they have sufficient assets to meet their financial obligations as they come due. Solvency reflects the long-term financial health of an entity, as opposed to liquidity, which concerns short-term obligations. Solvent entities are in a strong position to manage both current and future debts, and maintain operations without the risk of default or bankruptcy.

Example

A company with $2 million in assets and $1 million in liabilities is solvent, as it has enough assets to cover its debts.

Key points

• Indicates the ability to meet long-term financial obligations.

• Reflects overall financial health and stability.

• Being solvent reduces the risk of default or bankruptcy.

Quick Answers to Curious Questions

It ensures the company can meet its debts and continue operations over the long term.

Solvency focuses on long-term financial obligations, while liquidity concerns short-term cash flow and immediate debts.

Reducing debt, increasing assets, or restructuring liabilities can help improve solvency.

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