What is 'Solvency'
Solvency is the ability of a company to meet its longterm financial obligations. Solvency is essential to staying in business, but a company also needs liquidity to thrive. Liquidity is a company's ability to meet its shortterm obligations. A company that is insolvent must enter bankruptcy; a company that lacks liquidity can also be forced to enter bankruptcy even if it is solvent.
BREAKING DOWN 'Solvency'
Investors can use ratios to analyze a company's solvency. The interest coverage ratio divides operating income by interest expense to show a company's ability to pay the interest on its debt, with a higher result indicating a greater solvency. The debttoequity ratio divides a company's debt by its equity to show whether a company has taken on too much debt, with a lower result indicating a greater solvency. Solvency ratios vary by industry, so it's important to understand what constitutes a good ratio for the company in question before drawing conclusions from the ratio calculations.

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How do unfunded capital expenditures and distributions affect the fixed charge coverage ...
Learn about the most common solvency ratio and what it measures. Understand two other liquidity ratios that are commonly ... Read Answer >> 
Are solvency ratios more concerned with the shortterm or the longterm?
Learn what solvency is, how to use ratios to determine a company's solvency, and why solvency ratios are concerned with the ... Read Answer >> 
What are the differences between solvency ratios and liquidity ratios?
Learn about liquidity ratios and solvency ratios, some examples of these ratios and the main difference between them. Read Answer >> 
What can I tell about a company by looking at its solvency ratios?
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What is the difference the operating cash flow ratio and solvency ratio?
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