Solvency Ratio

One of many ratios used to measure a company's ability to meet long-term obligations. The solvency ratio measures the size of a company's after-tax income, excluding non-cash depreciation expenses, as compared to the firm's total debt obligations. It provides a measurement of how likely a company will be to continue meeting its debt obligations.

The measure is usually calculated as follows:

Investopedia Says:
Acceptable solvency ratios will vary from industry to industry, but as a general rule of thumb, a solvency ratio of greater than 20% is considered financially healthy. Generally speaking, the lower a company's solvency ratio, the greater the probability that the company will default on its debt obligations.

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Accounting ratios measuring the financial soundness of a business enterprise and its ability to meet short-term obligations as they come due. There are several commonly used solvency ratios:

• The quick ratio (also called the acid test ratio or liquid ratio), calculated from the following formula:

cash + accounts receivable / current liabilities

• The current ratio, a comparison of current assets and current liabilities that measures ability to pay current debts:

current assets / current liabilities

• The current liabilities to net worth ratio, which indicates the amount due to creditors within a year as a percentage of owners' (or stockholder's) capital:

current liabilities / net worth