A financial ratio that is intended to measure solvency or the extent to which an entity’s assets can cover its liabilities– i.e., its commitments for future payments (particularly, long-term liabilities). It is a measure of an entity’s capital adequacy, so to speak.
This ratio has many versions, which are generally reflect the entity’s financial position from a long-term solvency standpoint. These ratios (long-term solvency ratios) measure the entity’s ability to meet its long-term obligations. An entity may use such ratios in its decision-making for the long-term investment of its own funds (equity).
The main solvency ratios include:
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