# Solvency

## What is 'Solvency'

Solvency is the ability of a company to meet its long-term 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 short-term 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.

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## 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 debt-to-equity 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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1. ### How do unfunded capital expenditures and distributions affect the fixed charge coverage ...

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Learn what solvency is, how to use ratios to determine a company's solvency, and why solvency ratios are concerned with the ... Read Answer >>
3. ### 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 >>
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