Question

How the ‘solvency’ of a business is assessed by Financial Statement Analysis?

Answer 1

The solvency of a business is assessed by Financial Statement Analysis through solvency ratios that measure its ability to meet long-term liabilities. Key ratios include the debt-equity ratio, total assets to debt ratio, and proprietary ratio. These ratios indicate the proportion of owner’s funds versus borrowed funds and evaluate whether the business can repay its debts and meet interest obligations in the long term, reflecting financial stability and creditworthiness.