What is solvency?

Definition of Solvency

I use the term solvency to mean a company is able to 1) pay its obligations when they come due, and 2) continue in business.

Some people look to a company's working capital to decide whether a company is solvent. They conclude that a company with a positive amount of working capital is solvent. This is a short run view since the focus is on the company's current assets and its current liabilities.

Others look at a company's total assets and total liabilities or the company's debt to equity ratio when deciding whether a company is solvent. A company's solvency is also at risk if it is unable to operate profitably.

I suspect that the definition of solvency varies among people in the same country and from country to country. You should check the legal system in your country to find the appropriate meaning.

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