Solvency Ratio

Tax Glossary Definition

Solvency Ratio

A solvency ratio evaluates a company’s long-term financial strength by assessing its ability to meet debt obligations using its earnings or cash flows relative to total liabilities. This ratio helps determine whether the business can continue its operations without financial strain and manage its long-term commitments effectively.

Example: A company with a high solvency ratio demonstrates solid financial health and a lower likelihood of default, making it appealing to investors and lenders. In contrast, a low ratio may indicate potential solvency concerns and an increased risk of financial instability.

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