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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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?
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