What is solvency ratio?

Definition of solvency ratio

The solvency ratio measures a company’s ability to pay its debts. This is similar to the liquidity ratio, but it indicates whether cashflow is sufficient to meet long-term debt, rather than short-term.

How to calculate the solvency ratio

The solvency ratio is:

(Net after-tax income + non-cash expenses) / (short-term liabilities + long-term liabilities)

The lower a company's solvency ratio, the greater the probability that it will default on its debt obligations. Solvency ratios vary from industry to industry, but a ratio higher than 20% is generally considered to be financially healthy.

The solvency ratio is commonly used by prospective lenders when evaluating a business.

Got questions?

Bookkeeping and tax tips

We are committed to keeping your information safe. Read our Privacy Policy to find out more.

Are you an accountant or bookkeeper?

Find out more about FreeAgent for your practice.