Financial Statement Analysis
 Ratio Analysis of Financial Statements (Formula, Types, Excel)
 Ratio Analysis Advantages
 Ratio Analysis
 Liquidity Ratios
 Cash Ratio
 Cash Ratio Formula
 Quick Ratio
 Quick Ratio Formula
 Current Ratio
 Current Ratio Formula
 Acid Test Ratio Formula
 Defensive Interval Ratio
 Working Capital Ratio
 Working Capital Formula
 Net Working Capital Formula
 Changes in Net Working Capital
 Cash Flow from Operations Ratio
 Cash Reserve Ratio
 Operating Cycle Formula
 Current Ratio vs Quick Ratio
 Bid Ask Spread
 Liquidity vs Solvency
 Liquidity
 Solvency
 Solvency Ratios
 Equity Ratio
 Capital Adequacy Ratio
 Liquidity Risk
 Altman Z Score
 Turnover Ratios
 Inventory Turnover Ratio
 Accounts Receivable Turnover
 Accounts Receivables Turnover Ratio
 Accounts Payable Turnover Ratio
 Days Inventory Outstanding
 Days in Inventory
 Days Sales Outstanding
 Average Collection Period
 Days Payable Outstanding
 Cash Conversion Cycle
 Cash Conversion Cycle (CCC) Formula
 Fixed Asset Turnover Ratio Formula
 Debtor Days Formula
 Working Capital Turnover Ratio
 Profitability Ratios
 Profitability Ratios Formula
 Common Size Income Statement
 Vertical Analysis of Income Statement
 Profit Margin
 Gross Profit Margin Formula
 Gross Profit Percentage
 Operating Profit Margin Formula
 EBIT Margin Formula
 Operating Income Formula
 Net Profit Margin Formula
 EBIDTA Margin
 Degree of Operating Leverage Formula (DOL)
 NOPAT Formula
 OIBDA
 Earnings Per Share
 Basic EPS
 Diluted EPS
 Basic EPS vs Diluted EPS
 Return on Equity (ROE)
 Return on Capital Employed (ROCE)
 Return on Invested Capital (ROIC)
 Return on Sales
 ROIC Formula (Return on Invested Capital)
 Return on Investment Formula (ROI)
 ROIC vs ROCE
 ROE vs ROA
 CFROI
 Cash on Cash Return
 Return on Total Assets (ROA)
 Return on Average Capital Employed
 Capital employed Employed
 Return on Average Assets (ROAA)
 Return on Average Equity (ROAE)
 Return on Assets Formula
 Return on Equity Formula
 DuPont Formula
 Net Interest Margin Formula
 Earnings Per Share Formula
 Diluted EPS Formula
 Contribution Margin Formula
 Unit Contribution Margin
 Revenue Per Employee Ratio
 Operating Leverage
 EBIT vs EBITDA
 EBITDAR
 Capital Gains Yield
 Tax Equivalent Yield
 LTM Revenue
 Operating Expense Ratio Formula
 Overhead Ratio Formula
 Variable Costing Formula
 Capitalization Rate
 Cap Rate Formula
 Comparative Income Statement
 Capacity Utilization Rate Formula
 Total Expense Ratio Formula
 Efficiency Ratios
 Dividend Ratios
 Debt Ratios
 Debt to Equity Ratio
 Debt Coverage Ratio
 Debt Ratio
 Debt to Asset Ratio Formula
 Coverage Ratio
 Coverage Ratio Formula
 Debt to Income Ratio Formula (DTI)
 Capital Gearing Ratio
 Capitalization Ratio
 Interest Coverage Ratio
 Times Interest Earned Ratio
 Debt Service Coverage Ratio (DSCR)
 DSCR Formula (Debt service coverage ratio)
 Financial Leverage Ratio
 Financial Leverage Formula
 Degree of Financial Leverage Formula
 Net Debt Formula
 Leverage Ratios
 Leverage Ratios Formula
 Operating Leverage vs Financial Leverage
 Current Yield
 Debt Yield Ratio
 Solvency Ratio Formula
What is Solvency Ratio Formula?
The term “solvency ratio” refers to the measure of the ability of a company to pay off its financial debt obligations. Conversely, the solvency ratio determines whether the cash flow generated by the company is adequate to meet its short term and long term liabilities.
The formula for solvency ratio is derived by initially adding back noncash expenses to the net income and then dividing the result by the summation of short term liabilities and long term liabilities. Mathematically, it is represented as,
Explanation of the Solvency Ratio Formula
The formula for the calculation of solvency ratio can be obtained by using the following steps:
Step 1: Firstly, determine the net income of the company from the income statement.
Step 2: Next, determine the noncash expenses from the income statement again. Primary examples of noncash expenses are depreciation and amortization expense.
Step 3: Next, figure out the short term liabilities from the balance sheet and it comprises the current portion of the long term debt, short term bank borrowing etc.
Step 4: Next, figure out the long term liabilities from the balance sheet again and it primarily includes long term debt, bonds payable, customer deposits etc.
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Step 5: Now, add the value derived in step 1 and step 2 to compute the cash generated by the business. Next, add the value derived in step 3 and step 4 to compute the total liabilities. Finally, the formula for the calculation of solvency ratio is derived by dividing the cash generated by the total liabilities as shown above.
Example of Solvency Ratio Formula (with Excel Template)
Let’s see some simple to advanced examples of Solvency Ratios to understand it better.
Solvency Ratio Formula – Example #1
Let us take the example of a company called PQR Ltd for the calculation of the solvency ratio. The following information is available as per the annual report for the year ended on December 31, 2018.
Using the abovegiven information we will do the calculation of Solvency Ratio as follows,
 Solvency Ratio Formula = ($15,000 + $5,000) / ($25,000 + $35,000)
Solvency Ratio will be –
Solvency Ratio = 33.33%
Solvency Ratio Formula – Example #2
Let us take the example of Apple Inc.’s annual report as on September 29, 2018, 2017 and 2016. Do the calculation of the solvency ratio on the basis of the available information.
For the calculation of the Solvency Ratio, we will first calculate the following values.
Short Term Liabilities for 2018
Short term liabilities for 2018 = $55,888 Mn + $20,748 Mn + $40,230 Mn
= $116,866 Mn
Similarly, we will calculate the Short term liabilities for 2017 and 2016
Short term liabilities for 2017 = $44,242 Mn + $18,473 Mn + $38,099 Mn
= $100,814 Mn
Short term liabilities for 2016 = $59,321 Mn + $11,605 Mn + $8,080 Mn
= $79,006 Mn
Long Term Liabilities for 2018
 Long term liabilities for 2018 = $93,735 Mn + $45,180 Mn + $2,797 Mn
 = $141,712 Mn
Similarly, we will calculate the Long term liabilities for 2017 and 2016
 Long term liabilities for 2017 = $97,207 Mn + $40,415 Mn + $2,836 Mn
 = $140,458 Mn
 Long term liabilities for 2016 = $75,427 Mn + $36,074 Mn + $2,930 Mn
 = $114,431 Mn
Solvency Ratio for 2018
 Solvency Ratio Formula = ($59,531 Mn + $10,903 Mn) / ($116,866 Mn + $141,712 Mn)
 = 27.24%
Solvency Ratio for 2017
 Solvency Ratio for 2017 = ($48,351 Mn + $10,157 Mn) / ($100,814 Mn + $140,458 Mn)
 = 24.25%
Solvency Ratio for 2016
 Solvency ratio for 2016 = ($45,687 Mn + $10,505 Mn) / ($79,006 Mn + $114,431 Mn)
 = 29.05%
Therefore, it can be seen that despite some variation the last three years, Apple Inc.’s solvency ratio has remained at a fairly comfortable situation.
Solvency Ratio Calculator
You can use the following Solvency Ratio Calculator.
Net Income  
NonCash Expenses  
Short Term Liabilities  
Long Term Liabilities  
Solvency Ratio Formula =  
Solvency Ratio Formula = 



Relevance and Use of Solvency Ratio Formula
It is very important for a credit analyst to understand the concept of solvency ratio because it is one of the few financial ratios utilized to assess if a company can stay solvent. The solvency ratio helps in measuring the solvency of a company comprehensively, as it determines whether the actual cash flow of the company (net income + depreciation and other noncash expenses) will be sufficient in relation to all the liabilities, both short term, and long term debt. In this way, the solvency ratio helps in the assessment of the long term health of a company by computing its debt repayment ability (principal repayment of long term debt and its interest payment).
The solvency ratio also finds extensive application in the insurance industry, where it is used to compare the size of its capital visàvis the premiums were written and helps in the assessment of the risk that an insurer faces in terms of claims to be covered.
Recommended Articles
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