Solvency  ratio is little different from Equity Ratio. We can explain it as 100 - Equity Ratio. This ratio is the relationship between total outside liabilities and total assets. This ratio tells the percentage of  total outside liabilities' which has been  invested money  in total assets.

Formula of Solvency Ratio

If this ratio is 100%. It means whole money which was invested in the total assets, is of short term and long term debt. It this Ratio is just 10%, it means, company has just taken 10% of total purchased assets from Debt. Other 90% money is from debt.

For Example

Total Outside liabilities  is Rs. 4,00,000

Total Assets are Rs. 6,00,000

Proprietory Ratio is =  4,00,000/ 6,00,000 = 66.67 %

Interpretation of  Solvency  Ratio

In above example, we find 66.67% as solvency  ratio. It means Rs. 66.67 in total asset of Rs. 100 is of short term and long term debt. Other money in total assets is of shareholders. If this rate will be low, this will give more solvency power to company. Solvency means the power to repay the loan. If solvency ratio is just 10%. It means 90% money is of shareholders. So, to pay 10% outside life is not a big task. But when solvency ratio is very high, then it will be the question mark of the solvency of company.

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Accounting Education: Solvency Ratio
Solvency Ratio