1. Money
Send to a Friend via Email

Solvency

By

Definition:

Solvency is the ability of a business to have enough assets to cover its liabilities. Solvency is often confused with liquidity, but it is not the same thing.

Solvency is often measured as a ratio, the "current ratio," which is the total current assets divided by the total current liabilities. In order to be solvent and cover liabilities, a business should have a current ratio of 2/1, meaning that it has twice as many current assets as current liabilities. This ratio recognizes the fact that selling assets to obtain cash may result in losses, so more assets are needed.

Common Misspellings: The business is solvent and not likely to need to declare bankruptcy, because its current ratio is 2.5 to 1.

©2014 About.com. All rights reserved.