What is the solvency ratio?
A solvency ratio is a measure of a company's ability to meet its long-term financial obligations. High solvency ratios indicate financial stability, while low ratios may signal future financial struggles. This ratio is vital for lenders, potential investors, and suppliers.
Solvency Ratio Explained
The solvency ratio is a financial health indicator of a business's ability to pay its long-term debts. It uses actual cash flow, including non-cash expenses like depreciation. The solvency ratio compares this cash flow to all company liabilities to gauge long-term financial health. Insurance companies also use the term to measure their capital against the premiums they collect and potential risk.
Solvency Ratio Calculation
Solvency Ratio = (Net income + Depreciation) / All obligations (Long-term + Short-term liabilities)