What is a solvency ratio used to assess?

A solvency ratio is a key financial metric that measures a company's ability to meet its long-term obligations. It evaluates the relationship between a company's total assets and total liabilities, providing insight into its financial stability and overall solvency. By determining how well a company can cover its long-term debts, investors and creditors can assess the risk associated with lending money or investing in that company.

Focusing on long-term obligations, these ratios are crucial for understanding whether a company is in a position to sustain operations and grow over time without defaulting on its debts. They often include ratios such as the debt to equity ratio and the interest coverage ratio, which specifically highlight how much debt the company has relative to its equity and how easily it can make interest payments, respectively. This is essential for longer-term forecasting and understanding the financial health of the business beyond immediate concerns.