Solvency

Business Finance

Solvency is the ability to meet long-term financial obligations — distinguished from liquidity (short-term). Measured by debt-to-equity ratio, debt-to-asset ratio, and interest coverage ratio (EBIT/Interest). Solvent companies have assets exceeding liabilities; insolvent companies don't. A business can be liquid (cash on hand) but insolvent (massive long-term debt). Solvency analysis is critical for bond investors and lenders. The 'solvency margin' for insurance companies is regulated — capital must exceed expected claims by specified ratios. Restructuring, asset sales, or Chapter 11 bankruptcy address solvency problems; new credit lines address liquidity problems. Both are necessary; neither sufficient.