what is a solvency ratio 
a solvency ratio is a key metric used to measure an enterprise s ability to meet its long term debt obligations and is used often by prospective business lenders a solvency ratio indicates whether a company s cash flow is sufficient to meet its long term liabilities and thus is a measure of its financial health an unfavorable ratio can indicate some likelihood that a company will default on its debt obligations investopedia laura porterunderstanding solvency ratiosa solvency ratio is one of many metrics used to determine whether a company can stay solvent in the long term a solvency ratio is a comprehensive measure of solvency as it measures a firm s actual cash flow rather than net income by adding back depreciation and other non cash expenses to assess a company s capacity to stay afloat it measures this cash flow capacity versus all liabilities rather than only short term debt this way a solvency ratio assesses a company s long term health by evaluating its repayment ability for its long term debt and the interest on that debt solvency ratios vary from industry to industry a company s solvency ratio should therefore be compared with its competitors in the same industry rather than viewed in isolation a solvency ratio terminology is also used when evaluating insurance companies comparing the size of their capital relative to the premiums written and measures the risk an insurer faces on claims it cannot cover the main solvency ratios are the debt to assets ratio the interest coverage ratio the equity ratio and the debt to equity d e ratio these measures may be compared with liquidity ratios which consider a firm s ability to meet short term obligations rather than medium to long term ones types of solvency ratiosthe interest coverage ratio is calculated as follows interest coverage ratio ebit interest expenses text interest coverage ratio frac text ebit text interest expenses interest coverage ratio interest expensesebit 