The Finance Book

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.

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