What are good solvency ratios?
Sarah Garza
Updated on February 19, 2026
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. A lower ratio is better when debt is in the numerator, and a higher ratio is better when assets are part of the numerator.
How do you find the solvency ratio?
The solvency ratio helps us assess a company’s ability to meet its long-term financial obligations. To calculate the ratio, divide a company’s after tax net income – and add back depreciation– by the sum of its liabilities (short-term and long-term).
How can a company improve solvency ratio?
Approaches for improving your business’s solvency include the following:
- Increase Sales. Building up your sales and marketing efforts can greatly increase your revenues in the medium to long term.
- Increase Profitability.
- Increase Owner Equity.
- Sell Some Assets.
- Reorganize.
Who is interested in solvency ratios?
There are several solvency ratios that analysts can use. Some of these ratios are technical—of use primarily to auditors or corporate analysts. Others are easily assessed by accountants, business owners, and investors alike. Here are three simple equations to begin your solvency ratio analysis.
What are long term solvency ratios?
Long term solvency ratio is the total asset of the company divided by the total liabilities or debt obligations in the market. Long term liabilities are listed in the balance sheet, debentures, loans, tax, and pension obligations.
Is Dscr a solvency ratio?
DSCR = Net Operating Income / Total Debt Service A ratio of one or above is indicative that a company generates sufficient earnings to completely cover its debt obligations.
What improves solvency?
Issue stock. If yours is a traded company, you may issue new shares to boost your cash flow. Businesses can use this money for short-term obligations and debt. And it can help boost your solvency and get you out of any immediate high-risk debt.
What are the different types of solvency ratios?
Solvency Ratio Formula 1 Debt to equity ratio Debt to equity is one of the most used debt solvency ratios. It is also represented as D/E ratio. 2 Debt to Capital Ratio Debt to capital ratio is a financial ratio that is used in measuring a company’s financial leverage. 3 Total Debt to Total Asset Ratio
What can I do to improve my solvency ratio?
One can improve the solvency ratio by boosting the profitability of the firm in the long term while improving the Debt to total assets ratio. Then, further ways that can improve the solvency ratios are by re-evaluating the operating expenses along with looking for bulk discounts.
Which is a better measure of solvency of a company?
Measuring cash flow rather than net income is a better determinant of solvency, especially for companies that incur large amounts of depreciation on their assets but have low levels of actual profitability. The solvency ratio examines a company’s ability to meet its long-term obligations.
When did the solvency ratio come into force?
The requirement itself is an amount in the company’s functional currency. The ratio is a percentage. Since Solvency II came into force at 1 January 2016 the rules for required capital changed. As a result, insurance companies have two regulatory capital requirements to manage and monitor.
