Solvency ratios help measure financial health by showing how well a company meets long-term obligations. These ratios differ fromliquidity ratios, which focus on short-term debts. By examining solvency ratios, you get a clearer picture of your long-term financial stability.
One common solvency ratio is the debt-to-equity ratio. It compares total debt to total equity. This helps determine if a company relies more on debt or equity to finance its assets. A high ratio may indicate higher financial risk.
Another important solvency measure is the debt-to-assets ratio. This shows what percentage of assets is financed by debt. A lower ratio suggests more financial stability. Less debt means less financial pressure.
In this article, we examine how analyzing solvency ratios gives insights into your company's overall leverage. The ratios also help you predict your ability to continue operations in the future.