Using cash from business operations, the solvency ratio shows the company's ability to meet its short-term and long-term obligations. The higher the solvency ratio, the stronger the company's financial position. On the other hand, if this ratio is low, then the company may fail to pay its obligations.

The solvency ratio is therefore frequently used by creditors. They need to ensure that the money lent plus the interest will be repaid. Investors can use this ratio to determine whether a company's ability to generate profits exceeds its obligations.

There are quite a few different kinds of solvency ratios. However, one of them is considered 'core'. Divide profit and depreciation by short- and long-term liabilities. The formula looks like the image below when written as an equation.

A solvency ratio is a key financial metric used to evaluate a company's ability to meet its long-term debt obligations and sustain operations over time. It measures the proportion of a company's assets relative to its liabilities, indicating financial stability and health. Common solvency ratios include the debt-to-equity ratio, which compares total debt to shareholders' equity, and the interest coverage ratio, which assesses the ability to cover interest payments with earnings. A higher solvency ratio generally suggests a stronger financial position, as the company is better equipped to manage debt and avoid insolvency. Investors and creditors use solvency ratios to assess risk and make informed decisions about lending or investing in a company. Maintaining a healthy solvency ratio is crucial for long-term business sustainability.