Solvency Ratio

The Solvency ratio is a way investors can measure the company’s ability to meet its long term obligations. Obviously if the company is going to go bankrupt you do not want to invest in it.

The formula looks like this

Solvency Ratio = (After Tax Profits + Depreciation)/ (long term liabilities + Short term liabilities

The higher the ratio is the better equipped a company is to pay off its debts and survive in the long term. In general a ratio of 20% or higher is considered to be a good ratio where as a ratio of 20% or lower is considered to be a bad ratio.

As most ratios this should be compared with other companies in the same industry group. Some groups like airlines will have much higher debt then others such as internet companies. That should be taken into consideration.