I spoke in previous blogs about the importance of Profitability Ratios, then Efficiency Ratios, then Liquidity Ratios. Finally, in this blog, I highlight the importance of Solvency Ratios.

It’s important to not confuse Solvency with Liquidity. While both set of ratios measure the financial health of a company, they have notable differences. As previously explained, the Liquidity Ratios are used to determine a company’s ability to pay off its short-term debts (12 months and less). The Solvency Ratios measure the ability for a company to meet its long-term financial obligations.

In other words, the Liquidity Ratios measure the ability to quickly convert assets into cash, while the Solvency Ratios checks that the business owns more than it owes. The latter has a longer term emphasis. Read more →