1. What is the Solvency Ratio?

The Solvency Ratio measures a company's ability to meet its long-term debt obligations. It indicates whether a company's cash flow is sufficient to cover its total liabilities, providing insight into financial stability and long-term viability.

2. How Does the Calculator Work?

The calculator uses the Solvency Ratio formula:

Where:

• \( \text{Net Income} \) — Company's total earnings after expenses and taxes
• \( \text{Depreciation} \) — Non-cash expense representing asset value reduction
• \( \text{Total Liabilities} \) — Sum of all debts and obligations

Explanation: The ratio shows how many times a company can cover its liabilities with its operating cash flow (approximated by net income plus depreciation).

3. Importance of Solvency Ratio

Details: A higher solvency ratio indicates better financial health and lower risk of default. Creditors and investors use this ratio to assess a company's ability to repay long-term debts and sustain operations.

4. Using the Calculator

Tips: Enter net income and depreciation in dollars, total liabilities in dollars. All values must be valid (non-negative numbers, total liabilities > 0).

5. Frequently Asked Questions (FAQ)

Q1: What is a good solvency ratio?
A: Generally, a ratio above 0.2-0.3 is considered healthy, but this varies by industry. Higher ratios indicate better solvency.

Q2: How does solvency ratio differ from liquidity ratio?
A: Solvency ratio measures long-term financial stability, while liquidity ratios focus on short-term ability to meet obligations.

Q3: Why add depreciation to net income?
A: Depreciation is a non-cash expense that reduces net income but doesn't affect cash flow, so it's added back to better represent actual cash generation.

Q4: How often should solvency ratio be calculated?
A: It should be calculated quarterly or annually as part of regular financial analysis to monitor long-term financial health.

Q5: What are limitations of this ratio?
A: It doesn't account for the timing of cash flows, quality of assets, or industry-specific factors that may affect solvency.