Solvency

Solvency (soliditet) is a financial key figure that measures the degree of financial stability and the ability to absorb losses in a business. In everyday use, soliditet and the equity ratio are treated as the same thing, and the equity ratio — how much of total assets is financed by equity — is the single most important measure of it. Strictly speaking, though, soliditet is the broader concept, and is also assessed using the debt-to-equity ratio and the interest coverage ratio. The Norwegian term has no single exact English equivalent; it describes financial strength, or solvency in the sense of long-term robustness rather than the ability to pay a particular bill.

Solvency is therefore a measure of what proportion of the company's total assets is financed by equity. It is an indicator of the company's financial stability, its long-term financial health and its ability to absorb losses.

How it is calculated

Solvency is calculated by dividing the company's equity by its total assets, and then multiplying by 100 to give a percentage. The formula is as follows:

Solvency = (Equity / Total assets) × 100

What is solvency used for?

Solvency is used to assess a company's financial stability and financial health. It gives an insight into the degree of risk connected with the company's capital structure and its ability to handle financial losses or unfavourable conditions.

Tips for improving solvency

1. Increase equity. Add more equity to the company by injecting capital from the owners, generating a surplus or making capital contributions.
2. Reduce debt. Reduce the company's level of debt by repaying loans, restructuring debt or negotiating more favourable terms with creditors.
3. Improve profitability. Increase income, reduce costs or improve operating efficiency. This can help increase equity and thereby solvency.
4. Optimise the capital structure. Review the company's capital structure and the balance between debt and equity. Adjust the capital structure in order to achieve an optimal level of solvency that suits the company's risk profile and strategic goals.
5. Control costs. Identify opportunities for cost efficiencies and optimise the allocation of resources in order to reduce costs and improve the company's solvency.
6. Monitor and plan. Follow the level of solvency regularly, and set out a long-term plan to increase solvency gradually over time.

Adequate solvency is important in ensuring the company's ability to meet its financial obligations and handle potential losses. Solvency can vary depending on the industry, the size of the company and its risk profile.

Read more about how the key figures in Capassa keep solvency updated automatically.