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Solvency indicates the extent to which a company is able to meet its long-term debts. The index shows what portion of total assets is financed by equity. The higher the solvency, the greater the financial buffer to absorb losses. Low solvency means that a company relies relatively heavily on borrowed capital. Solvency is usually expressed as a percentage and calculated based on data from the balance sheet.
Within credit analysis, solvency is an important indicator of structural financial stability. It helps assess bankruptcy risk and determine credit terms. Declining solvency can be grounds for reassessing the risk profile.
A company with 40 percent equity to total assets has 40 percent solvency.
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