Solvency ratio

A solvency ratio is a financial ratio used to assess an organisation's ability to meet its longer-term obligations and remain financially sound over time. Solvency ratios are used in financial statement analysis to understand leverage and long-term funding capacity, and are also used in regulated sectors as part of supervisory monitoring of financial soundness.

The term is used in corporate finance, insurance regulation and pension funding, and the exact definition depends on the context, the accounting basis and, for regulated sectors, the jurisdiction.

In corporate finance, solvency ratios are commonly presented as debt ratios and coverage ratios, comparing debt or liabilities with assets or equity, and earnings with interest and other fixed charges.

In insurance, solvency measures often compare eligible regulatory capital with a required capital amount under a prudential regime such as Solvency II in the European Union.

In defined benefit pension schemes, solvency measures may compare scheme assets with liabilities calculated on a specified valuation basis, including an insurance buyout basis.

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