Solvency Ratio

A solvency ratio is a financial metric used to measure a company’s ability to meet its long-term debt obligations.It is calculated by comparing a company’s total assets to its total liabilities. A higher solvency ratio indicates that the company has more assets than liabilities and is better equipped to manage long-term debt. Solvency ratios are crucial in assessing a company’s financial stability and its ability to continue operations in the long term.

Example

A company has total assets of $1 million and total liabilities of $600,000. Its solvency ratio is 1.67, indicating it has $1.67 in assets for every $1 of debt.