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Solvency is an indicator used by lenders and investors to measure the financial health of a company. It provides insight into the extent to which a company can meet its obligations in the long term. Long term is when a company stops or goes bankrupt. You can assess whether a company is solvent based on the ratio between the company’s equity capital and total capital. Equity is the money invested by owners in a business.

The Choice of the Company

If a company has a relatively large amount of equity capital, it will probably be able to meet its interest and repayment obligations in the long term and will not go bankrupt quickly. A company is then solvent.

  • The solvency ratio is a financial ratio that indicates which part of a company’s total capital is financed with equity capital.
  • The solvency ratio is an important indicator for banks and investors. If a company has relatively little debt and therefore a lot of equity, it can probably also pay back its debts in the long term. This limits the risks of lenders and investors.
  • Banks assess the creditworthiness when applying for a loan. Investors like Warren Buffett invest in companies that are financed conservatively, ie companies with a relatively large amount of equity.

Calculate solvency

To calculate solvency, you need the equity and total assets of a company. You can find this information for calculating solvency on the balance sheet. Equity is the equity invested by owners in a business. With the business calculator this is important.

The balance sheet is part of a company’s annual accounts. Solvency ratio formula:

Solvency ratio = equity / total assets 100%

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Solvency ratio standards

Suppose you want to start a new one and need € 100,000 to do so. Then you need at least 25% or € 25,000 of your own money. For catering and retail trade € 40,000. You cannot get a business loan from a bank without your own money.

As an entrepreneur you would like to have insight into the figures. How is your business? You map this out with various financial calculations. One of these is solvency. But what is solvency and what’s in it for you?

What is Solvency?

Solvency is a term often used to describe whether your business is financially sound. The more equity there is in your company, the less dependent you are on so-called lenders, for example the bank. Solvency represents the ratio between your equity (assets) and the borrowed capital (debts) of your company.

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