Solvency Ratio: Assessing Financial Stability of Companies
Understanding a company's financial health is crucial for investors, creditors, and other stakeholders. One of the primary metrics used to determine this is the solvency ratio, which assesses a company's ability to meet its long-term liabilities. The solvency ratio is essential as it reflects the risk of a company becoming insolvent. It provides a more comprehensive picture of the long-term financial stability of a company than operational or profitability metrics alone.
What is the Solvency Ratio?
The solvency ratio is a key metric used to evaluate a company's ability to meet its long-term obligations. It measures the ratio of a company's net worth over its total assets. The formula for calculating the solvency ratio is:
[ text{Solvency Ratio} = frac{text{Net Income} + text{Depreciat...