the solvency ratio is one of many ratios used to measure a company's ability to pay its debts. the formula to determine the solvency ratio is the sum of net after-tax profit and depreciation divided by the sum of short-term and long-term liabilities. solvency ratios are expressed as a percentage. the higher the ratio, the better. a company with a high solvency ratio is in good health and more than likely will be able to service its debt. conversely, a company with a low solvency ratio is at risk for defaulting on its debts and possibly bankruptcy. comparing the solvency ratio with other debt ratios, the solvency ratio is more comprehensive because it focuses on cash flow. in addition, the solvency ratio includes all obligations, such as accounts payable and long-term capital commitments. those are not included in debt-to-equity, debt-to-assets and interest-coverage ratios. just because a solvency ratio is low compared to another company does not mean one company is in ? than the other. utilico is utility company with a large amount of plant and equipment assets on its balance sheets. utilico issues debt to finance its plant and equipment purchases. utilico is also a government regulated utility. so, its profit ? steady but low. as a result, utilico has a low solvency ratio. techco is a technology company with high margin revenue generated from its sale and licensing of software. this leaves techco flush with cash and very little debt. as a result, techco's solvency ratio is high. but, it will be like comparing apples and oranges to say utilico has a bad solvency ratio as compared to techco's. utilico's solvency ratio would only be bad if it ? low compared to other companies within utilico's industry.
- solvency ratio・・・支払能力比率
- flush with cash・・・景気が良い