What is a company’s solvency? Simply put, it refers to its ability to meet its long-term financial obligations. Investors and shareholders are concerned about a company’s solvency. They want to know that it will continue to grow and produce dividends. Likewise, they want to ensure that the company is able to pay off its liabilities. A company’s solvency reflects its financial strength. However, not all companies are created equal.
When evaluating a business’s solvency, the first thing to consider is whether the business can afford to meet its long-term financial obligations. Typically, a company is solvent when its current assets exceed its current liabilities. This means that it can expand and meet its long-term financial commitments. It is also important to note that a company with an overriding balance sheet may be a good investment. In many cases, it is best to invest in a business that has a high solvency ratio.
The second metric of solvency is liquidity. A company’s liquidity demonstrates its ability to meet short-term debt obligations using current assets. The faster a company can turn current assets into cash, the higher its solvency is. If a company has a high liquidity level, it is more likely to be solvent than one with a low level of it. A company with a low level of solvency will have problems meeting its short-term financial obligations.