# Solvency Ratio

## Quick Definition
A measure of a company's ability to meet long-term obligations and continue operating indefinitely.

## 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.

### Formula
Solvency Ratio = (Net Income + Depreciation) ÷ Total Liabilities  
Expressed as a percentage

### Example
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.

## Related Terms
[**Debt-to-Equity Ratio**  
A measure of financial leverage comparing total debt to shareholders' equity.  
Learn more](/content/terms/debt-to-equity-ratio/index.html)

[**Current Ratio**  
A liquidity ratio measuring ability to pay short-term obligations with current assets.  
Learn more](/content/terms/current-ratio/index.html)

[**Interest Coverage Ratio**  
A measure of how easily a company can pay interest expenses on outstanding debt.  
Learn more](/content/terms/interest-coverage-ratio/index.html)

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