How to take into account the solvency ratio in your business?
Posted: Wed Dec 18, 2024 8:30 am
Learn what the solvency ratio is, how it is calculated and how performing a correct analysis can benefit your professional activity.
The short-term solvency ratio is identified with liquidity.
The solvency ratio itself is an important security factor for creditors.
Solvency ratios are an djibouti email list important element in decision-making . They are important within the company itself, which can establish objectives related to them and corrective measures in the event of deviations. They are also important for third parties who want to analyse the extent to which the company's projects are viable.
They are therefore indicators of stability and responsiveness . But a balance must be maintained, since trying to be excessively solvent can lead to rejecting many reasonable risks. Let's see how to use solvency ratios.
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Solvency ratios: what they are and how they are calculated
In fact, there are multiple formulations of the solvency ratio. Two of the most important are the guarantee ratio and the technical or current solvency ratio. The guarantee ratio or, simply, solvency ratio is calculated:
With real assets , what we are delimiting is the part of the asset that has some liquidation value. That is, we remove the fictitious assets and only value in the numerator that part that can be used to obtain funds with which to satisfy the debts. It is usually around a value of 1.5.
Logically, this ratio will be higher the more the net worth is in financing the company. Therefore, companies with high financial leverage will have a low ratio.
As we have said, in general terms, most companies have a short-term solvency ratio that ranges between 1.5 and 3. A lower ratio is interpreted as a risk to the treasury. A higher ratio is seen as an excess of liquidity that can hinder profitability.
However, there are many aspects to consider in order to interpret whether a specific company's figure is moving in the correct range:
The short-term solvency ratio is identified with liquidity.
The solvency ratio itself is an important security factor for creditors.
Solvency ratios are an djibouti email list important element in decision-making . They are important within the company itself, which can establish objectives related to them and corrective measures in the event of deviations. They are also important for third parties who want to analyse the extent to which the company's projects are viable.
They are therefore indicators of stability and responsiveness . But a balance must be maintained, since trying to be excessively solvent can lead to rejecting many reasonable risks. Let's see how to use solvency ratios.
Download the FREE guide “Learn to manage your cash flow like an expert”
Solvency ratios: what they are and how they are calculated
In fact, there are multiple formulations of the solvency ratio. Two of the most important are the guarantee ratio and the technical or current solvency ratio. The guarantee ratio or, simply, solvency ratio is calculated:
With real assets , what we are delimiting is the part of the asset that has some liquidation value. That is, we remove the fictitious assets and only value in the numerator that part that can be used to obtain funds with which to satisfy the debts. It is usually around a value of 1.5.
Logically, this ratio will be higher the more the net worth is in financing the company. Therefore, companies with high financial leverage will have a low ratio.
As we have said, in general terms, most companies have a short-term solvency ratio that ranges between 1.5 and 3. A lower ratio is interpreted as a risk to the treasury. A higher ratio is seen as an excess of liquidity that can hinder profitability.
However, there are many aspects to consider in order to interpret whether a specific company's figure is moving in the correct range: