Solvency Ratio Definition | Investopedia

Page 1 of 4

Free Newsletters | Free Annual Reports | Register | Sign in

Search Investopedia

DICTIONARY
#

INVESTING
B

MARKETS

PERSONAL FINANCE
G

ACTIVE TRADING
K

FINANCIAL ADVISORS
N

Symbol

EXAM PREP
R

TUTORIALS
T

VIDEO
W

Solvency Ratio

SIMULATOR
X

AAA |

You may also like: Does Warren Buffett own the same stock as you?

DEFINITION OF 'SOLVENCY RATIO'

A key metric used to measure an enterprises ability to meet its debt and other
obligations. The solvency ratio indicates whether a companys cash flow is
sufficient to meet its short-term and long-term liabilities. The lower a company's
solvency ratio, the greater the probability that it will default on its debt
obligations.
The measure is usually calculated as follows:

Ads
Monthly SIP Investments
www.myuniverse.co.in/ZipSip
Invest as low as Rs 1000pm in Top
SIPs in just 2mins. Start a ZipSip.

Swiss Fund Representative

ifit.net
Gateway to fund distribution in
Switzerland with Swiss Paying Agent

Marketplace
Complimentary Futures Trading Kit
Signup for a free email Trading Course
Exclusive: Learn the "House Odds" of Investing

INVESTOPEDIA EXPLAINS 'SOLVENCY RATIO'

Are you interested in generating income?

Solvency ratio, with regard to an insurance company, means the size of its
capital relative to the premiums written, and measures the risk an insurer faces
of claims it cannot cover.
The solvency ratio is only one of the metrics used to determine whether a
company can stay solvent. Other solvency ratios include debt to equity, total
debt to total assets, and interest coverage ratios.
However, the solvency ratio is a comprehensive measure of solvency, as it
measures cash flow rather than net income by including depreciation to
assess a companys capacity to stay afloat. It measures this cash flow capacity in
relation to all liabilities, rather than only debt. Apart from debt and borrowings,
other liabilities include short-term ones such as accounts payable and long-term
ones such as capital lease and pension plan obligations.
Measuring cash flow rather than net income is a better determinant of solvency,
especially for companies that incur large amounts of depreciation for their
assets but have low levels of actual profitability. Similarly, assessing a companys
ability to meet all its obligations rather than debt alone provides a more
accurate picture of solvency. A company may have a low debt amount, but if its
cash management practices are poor and accounts payable is surging as a result,

Easiest Way to Pull Profits from the Market...

FREE Award-Winning Software - Ninja Trader

HOT DEFINITIONS
Efficiency Ratio
Fixed Cost
Subsidy
Sunk Cost
Technical Skills
Prepaid Expense

Trading Center

its solvency position may not be as solid as would be indicated by measures that
include only debt.

http://www.investopedia.com/terms/s/solvencyratio.asp

04-03-2015

Solvency Ratio Definition | Investopedia

Page 2 of 4

A companys solvency ratio should also be compared with its competitors in the
same industry rather than viewed in isolation. For example, companies in debtheavy industries like utilities and pipelines may have lower solvency ratios than
those in sectors such as technology. To make an apples-to-apples comparison,
the solvency ratio should be compared for all utility companies, for example, to
get a true picture of relative solvency.

VIDEO

Refine Your Financial Vocabulary

Gain the Financial Knowledge You Need to Succeed. Investopedias FREE Term
of the Day helps you gain a better understanding of all things financial with
technical and easy-to-understand explanations. Click here to begin developing
your financial language with this daily newsletter.

TAGS:

Fundamental Analysis

Solvency

Solvency Ratio

Ads
Reliance Life Insurance
reliancelife.com/Life_Insurance
1Cr Cover @ Rs450 or 50 Lac @ Rs253 Per month, Policy Term up to 35 yrs
Asset Liability Modeling
www.protinus.de
Individuelle Beratung in Asset Liability Modeling
Questions & Solutions
www.meritnation.com/Questions
Lessons, Animations, Videos & more. Maths, Science, SST, Join Free!

License Content Order Reprints

Follow Term Of The Day:

Subscribe:
Enter e-mail address

Sign Up

http://www.investopedia.com/terms/s/solvencyratio.asp

04-03-2015

Solvency Ratio Definition | Investopedia

Page 3 of 4

RELATED TERMS
Statutory Reserves

Bridge Bank

State regulated reserve requirements.

Insurance companies must ...

A bank authorized to hold the assets and

liabilities of another ...

Economic Capital

Texas Ratio

The amount of capital that a firm, usually

in financial services, ...

A ratio developed by Gerald Cassidy and

other analysts at RDC ...

Credit Enhancement

Merton Model

A method whereby a company attempts to

improve its debt or credit ...

A model, named after the financial scholar

Robert C. Merton, ...

RELATED ARTICLES
PERSONAL FINANCE

Texas Ratio Rounds Up Bank Failures

This measure can help investors spot potential trouble in a
bank's financials. Find out how.

SPONSORED BY

Five Chart Patterns You Need To Know

INVESTING BASICS

Analyze Investments Quickly With Ratios

Make informed decisions about your investments with these
easy equations.

FUNDAMENTAL ANALYSIS

Analyzing Investments With Solvency Ratios

Solvency ratios are extremely useful in helping analyze a
firms ability to meet its long-term obligations; but like most
financial ratios, they must be used in the context of an
overall company ...
FUNDAMENTAL ANALYSIS

Financial Analysis: Solvency Vs. Liquidity Ratios

Solvency and liquidity are equally important for a company's
financial health. A number of financial ratios are used to
measure a companys liquidity and solvency, and an investor
should use ...
OPTIONS & FUTURES

Understanding Financial Liquidity

Understanding how this measure works in the market can
help keep your finances afloat.

TRADING STRATEGIES

Introduction to Types of Trading: Fundamental

Traders
Learn about the different traders and explore in detail the
broader approach that focuses on company-specific events.

BONDS & FIXED INCOME

An Overview Of Corporate Bankruptcy

If a company files for bankruptcy, stockholders have the
most to lose. Find out why.

MARKETS

Introduction To Fundamental Analysis

http://www.investopedia.com/terms/s/solvencyratio.asp

04-03-2015

Solvency Ratio Definition | Investopedia

Page 4 of 4

Learn this easy-to-understand technique of analyzing a

company's financial statements and reports.
FUNDAMENTAL ANALYSIS

Efficiency Ratio
There are many types of efficiency ratios, but all measure
how well a company utilizes its resources to make a profit.
Business managers use these ratios to determine how well
they are operating ...

Top SIP Investment

plans
Compare & invest in best Funds.
0 paper work. Start today.

YOU MAY ALSO LIKE

U.S. Debt by President

Safest Dividend Stocks

In The Market

6 Money Goals You

Should Conquer in
Your 20's

11 Ways to Make
Money Without Doing
Anything

Millennials Are
Completely Broke

Outrageous Celebrity
Appearance Fees

5 Signs That You're

Living Beyond Your
Means

Will Gold Coins Suffer

the Fate of the
$10,000 Bill?

TOP

Search Investopedia

DICTIONARY: #

CONTENT LIBRARY
Articles

Terms

Symbol

CONNECT WITH INVESTOPEDIA

Videos

Free Annual Reports

Tutorials

Slideshows

Stock Simulator

FXtrader

FAQs

Calculators

Exam Prep Quizzer

Chart Advisor

Stock Analysis

Net Worth Calculator

WORK WITH INVESTOPEDIA

License Content

Advertise With Us

Write For Us

Email Deployment

Contact Us

Careers

INV Sweden

Sign Up for Our Free Newsletters!

Subscribe

2015, Investopedia, LLC. All Rights Reserved Terms Of Use Privacy Policy

http://www.investopedia.com/terms/s/solvencyratio.asp

04-03-2015