Quick Definition

The solvency ratio is a key financial metric used to measure a company's ability to meet its long-term debt obligations and other financial commitments. It indicates the financial health and stability of a company by comparing its total assets to its total liabilities.

Formula

Examples

• 1An insurance company with total assets of $10 million and total liabilities of $5 million has a solvency ratio of 2.0, indicating strong financial health.
• 2A manufacturing firm struggling to pay off long-term debts might have a solvency ratio of 0.8, suggesting potential financial distress.
• 3A retail chain with a solvency ratio of 1.5 is considered stable, as its assets sufficiently cover its liabilities.
• 4A tech startup with rapid growth might maintain a solvency ratio of 3.0, showcasing its ability to handle additional financial risks.

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