Solvency Ratio

What is Solvency Ratio?

Solvency Ratio measures long-term financial health by comparing net income plus depreciation to total liabilities. It answers: can this business meet all its obligations over time, not just immediate bills?

Why Solvency Matters

Liquidity ratios measure short-term survival. Solvency measures long-term viability. A company can have excellent liquidity but poor solvency if long-term debt is overwhelming relative to earnings power.

For founders planning multi-year growth trajectories, solvency analysis ensures the business model can sustain itself through investment cycles without becoming overleveraged.

Interpreting Solvency Ratio

Higher is better. A ratio above 20% is generally considered healthy. Below 10% signals potential long-term financial stress even if short-term liquidity looks fine.

Your SaaS company has:

• Net Income: $200,000
• Depreciation: $25,000
• Total Liabilities: $750,000

Solvency Ratio = ($200,000 + $25,000) ÷ $750,000 = 30%

You generate 30 cents toward liabilities for every dollar you owe annually. That indicates strong long-term financial health.