26 Long-term solvency performance measures
‘Solvency is maintained by means of a national debt, on the principle, “If you will not lend me the money, how can I pay you?’”
Ralph Waldo Emerson, American philosopher and poet
In a nutshell
Solvency is the ability of a business to pay its long-term debts. It is critical to risk management and long-term success.
Solvency performance measures give an indication of ‘financial strength’, i.e. the ability to withstand exposure to short-term operating setbacks and achieve long-term growth.
Solvency is the result of a business’s ability to balance its risk and return by raising and maintaining the right type of cost-effective finance.
The key measures of solvency are gearing and interest cover.