|Solvency ratios are used to measure the financial
soundness of a business and how well it can satisfy its
obligations to lenders and creditors.
|Measures the extent to which a business can cover its
current liablities with those current assets that are readily
convertible to cash. Only cash and accounts receivable
would be included, since inventory and other assets would
require more time and effort to convert to cash.
Cash + Accounts Receivable
|Shows the working capital relationship that enables a
business to use its current assets to cover its current
|Shows the amounts due creditors within one year as a
percentage of the owners' investment. The smaller the net
worth and the larger the current liabilities, the less security
|Shows, as a percentage, the reliance on available inventory
for payment of debt. Or, "how much a company relies on
funds from sales of unsold inventories to meet its current
Basically, it would be best to see a low percentage here, as
it would indicate that the "inventory is paid for" and the
vendors/creditors would not be putting pressure on the
business to pay.
|Fixed assets to net worth shows the percentage of assets
centered in fixed assets compared to the total equity. The
higher this percentage, the more vulnerable the business
becomes to unexpected hazards and business climate
changes, as capital is frozen in the form of equipment and
the amount of operating funds is limited.
|Total liabilities to net worth shows how all of the company's
debt relates to the equity of the owners/stockholders. The
higher this ratio, the less protection there is for creditors.
|The following shows the relationship as to "who really owns"
the business, by showing how much of an investment each
category has; short term creditors, long term creditors, or
the listed owners.
Current Liabilities Creditors/Note Holders
Long Term Liabilities Banks/Bond Holders
Net Worth Stockholders/Owners
|Current Liabilities to Inventory
|Current Liabilities to Net Worth
|Fixed Assets to Net Worth
|Total Liabilities to Net Worth