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Solvency: Definition and Meaning
Definition
Solvency is a company’s ability to meet long-term obligations and continue operating over time.
Why It Matters
Solvency is broader than short-term liquidity. It considers capital structure, profitability, cash flow, debt obligations, asset values, refinancing needs, and the durability of operations. Lenders, sureties, owners, and potential buyers may evaluate solvency when assessing long-term financial health.
A company may have adequate short-term cash but still face long-term solvency concerns if debt levels are unsustainable or operations do not generate enough future cash flow.
Example
A lender evaluates a company’s debt, equity, earnings, asset base, and future cash-flow capacity before approving long-term financing.
Related Terms
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