If you ever study or deal with matters of a monetary or financial nature, then you hear certain terms. Sometimes, you might come across particular phrases or terms and not understand what they mean. If that’s the case, it’s understandable if you find yourself wondering just what is financial solvency?
In the realm of finance and business, financial solvency is described or defined as the degree to which a company’s or organization’s current assets exceed the liabilities of that same company or organization. Financial solvency is also alternatively defined or described as the power of a business to responsibly meet its longer-term fixed expenses necessary to engender future growth
A simple example to understand all this can actually be done on an individual basis, as a working adult is basically a business of one. If his or her income, savings, investments, property, and other assets are enough to keep paying monthly bills and reducing the person’s debts over time, then his or her net worth is going up over time. That is considered financial solvency.
On the other hand, if a person is seeing their amount of debt rise over time, even if they’re paying monthly bills and minimum debt payments, then they are financially insolvent on an increasing basis. This is often measured using credit scores.
Judging the financial solvency of a company is something many investors do in determining whether or not to buy their stock. It can also impact stock value.
Lenders often look at the financial solvency of an individual in determining the size and interest rates of loans they offer, much less whether or not to offer one at all. This measurement of the financial health and wellness of any individual, company, or organization should be used to map out a better future.