Answers the Question
Can we pay off our debts without dipping into our savings?
Calculator for Solvency Ratio
What Is the Solvency Ratio?
The solvency ratio is exactly what it sounds like. It's a measure of how well a firm can pay off its debts with the its income streams.
Why Is it Important?
- The greater the solvency ratio, the more stable a company appears to investors and creditors. As a result, (all things being equal) its shares will be seen as more valuable and lenders will be willing to allow the firm to borrow larger sums at more reasonable terms.
Formula(s) to Calculate Solvency Ratio
- SOLVENCY RATIO = (NET INCOME + DEPRECIATION) / ( SHORT TERM LIABILITIES + LONG TERM LIABILITIES )
- Many businesses (especially those early in an R&D effort) may have very profitable futures ahead, despite a significant lack of earnings.