The solvency ratio measures a company’s ability to meet its debts.

It determines if a company has sufficient assets to pay all debts and payment obligations at a given time.

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The solvency ratio is usually used by companies when they want to analyze the possibility of investing in new projects.

It is one of the ratios that financial entities take into account when a company asks them for financing.

How is the solvency ratio calculated?

To calculate our solvency ratio, we have to divide the total value of our assets by the total value of our liabilities, without including net worth.

Solvency ratio = Current assets + Non-current assets / Current liabilities + Non-current liabilities

What values can we obtain?

Three different values can be obtained:

• Equal to 1.5: There is no reason to worry, it is the ideal value.
• Below 1.5: Our company does not have the necessary solvency to face its short-term debts.
• Above 1.5: We may run the risk of having too much current assets (for example cash) that could lose value over time.

We hope this information is very useful to you.