Solvency is the ability to pay obligations long term. The current ratio is a liquidity ratio that measures a company's ability to cover its short-term obligations with its current assets. Liquidity also measures how fast a company is able to covert its current assets into cash. Acceptable solvency ratios vary from industry to industry, but as a general rule of thumb, a solvency ratio of greater than 20% is considered financially healthy. The higher the number, the healthier a company is. Common liquidity ratios include the following:The current ratioCurrent Ratio FormulaThe Current Ratio formula is = Current Assets / Current Liabilities. earn more income for the shareholders. This ratio is closely related to solvency ratios, which is mainly used to analyze the capital structure of a company. Investors need to look at overall investment appeal and decide whether a security is under or overvalued. The solvency ratio measures a company's ability to meet its long-term obligations as the formula above indicates. The solvency numbers will be more volatile than, say, banks’ Basel III capital ratios, so many insurers will set a target range and expect to fluctuate within that. Solvency ratios are either debt ratios (balance sheet-balance sheet) or coverage ratios (income statement-interest). Furthermore, a number itself won't give much of an indication. The ratio of purchases to furniture is 3 (3,00,000/1,00,000) but it hardly has any relevance. This way, a solvency ratio assesses a company's long-term health by evaluating its repayment ability for its long-term debt and the interest on that debt. There are three solvency ratios: debt, equity, and debt to equity. Profitability ratios, as their name suggests, measure the organisation’s ability to deliver profits. Again there is no industry standard for this ratio. In this video on Solvency Ratios, here we learn the list of Solvency Ratios along with its formulas and practical example. SR = ($… The debt-to-equity (D/E) ratio indicates how much debt a company is using to finance its assets relative to the value of shareholders’ equity. Solvency ratios are financial ratios which measures a company’s ability to pay off its long-term debt and associated interest obligations. Liquidityrefers to the ability of a company to pay off its short-term debts; that is, whether the current liabilities can be paid with the current assets on hand. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Moreover, the solvency ratio quantifies the size of a company’s after tax income, not counting non-cash depreciation expenses, as contrasted to the total debt obligations of the firm. 1,00,000 and Purchases are Rs. The rules are known as Solvency II and stipulate higher standards for property and casualty insurers, and life and health insurers. But this isn’t much of a concern given the firm has one of the largest balance sheets in the insurance industry and is generally able to fund its near-term obligations. Overall, a higher level of assets, or of profitability compared to debt, is a good thing. long term and short term liability are 50000. Solvency ratios are extremely useful in helping analyze a firm’s ability to meet its long-term obligations; but like most financial ratios, they must be used in the context of an overall company analysis. A recent analysis as of October 2013 details MetLife's debt-to-equity ratio at 102%, or reported debt slightly above its shareholders’ equity, or book value, on the balance sheet. This is an average debt level compared to other firms in the industry, meaning roughly half of rivals have a higher ratio and the other half have a lower ratio. 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