What does solvency refer to?

Solvency refers to a company's ability to meet its long-term financial obligations. This involves evaluating whether a company has enough assets to cover its long-term liabilities, such as loans, bonds, and other forms of debt that extend beyond one year. Solvency is a crucial aspect of financial health, as it indicates the sustainability and stability of an organization over time.

If a company is solvent, it means it can continue its operations without being forced into bankruptcy due to an inability to pay its debts. Investors and creditors often look at a company's solvency to gauge its financial strength and long-term viability. This contrasts with liquidity, which specifically pertains to a company’s ability to meet short-term obligations.

In summary, solvency is focused on the long-term financial commitments of a business, making it a critical metric for assessing the overall risk and longevity of the company.