Solvency Ratio

The solvency ratio is a financial metric used to assess the ability of a business to meet its long-term debt obligations.

Some examples of solvency ratios are:

• Debt to Equity Ratio

• Debt to Assets Ratio

• Interest Coverage Ratio

• Equity Ratio

• Debt Ratio

Acceptable solvency ratios vary from industry to industry, but a solvency ratio of greater than 20% to 30% is considered to be financially healthy. The lower a company's solvency ratio, the greater the probability that they will default on their obligations.

A high solvency ratio means that a business is in a strong financial position, and can be considered to be a buffer in the event that the company is ever in financial trouble.

Measuring a company's solvency is also necessary to project future cash flows, monitor long-term liabilities, establish budgets, and evaluate financial risk.