how solvency works
solvency portrays the ability of a business or individual to pay off its financial obligations for this reason the quickest assessment of a company s solvency is its assets minus liabilities which equal its shareholders equity there are also solvency ratios which can spotlight certain areas of solvency for deeper analysis many companies have negative shareholders equity which is a sign of insolvency negative shareholders equity insinuates that a company has no book value and this could even lead to personal losses for small business owners if not protected by limited liability terms if a company must close in essence if a company was required to immediately close down it would need to liquidate all of its assets and pay off all of its liabilities leaving only the shareholders equity as a remaining value the shareholders equity on a company s balance sheet can be a quick way to check a company s solvency and financial health carrying negative shareholders equity on the balance sheet is usually only common for newly developing private companies startups or recently offered public companies as a company matures its solvency position typically improves however certain events may create an increased risk to solvency even for well established companies in the case of business the pending expiration of a patent can pose risks to solvency as it will allow competitors to produce the product in question and it results in a loss of associated royalty payments further changes in certain regulations that directly impact a company s ability to continue business operations can pose an additional risk both businesses and individuals may also experience solvency issues should a large judgment be ordered against them after a lawsuit 