The solvency ratio is one of the key metrics to measure the ability of companies to meet their debts and other types of obligations. The solvency ratio serves to indicate whether the cash-flow (or cash flow), that is, the money available to the company is enough for it to face its short and long-term debts.
The lower the solvency ratio of a company, the more chances there are that it will not be able to meet its obligations and will not pay its debts.
How is the solvency ratio calculated?
As can be seen in the image, to calculate the solvency ratio, the current assets must be divided by the current liabilities.
The solvency ratio measures cash flow rather than net income, but also takes into account the depreciation of the company's assets. That is, it measures the ability to meet all your obligations and not just your debts.
The solvency ratio of any company should be compared with its competitors within the same sector rather than seen in isolation. For example, companies in sectors where they traditionally have higher debts may have better solvency ratios than others in sectors such as technology.