Solvency is a financial term that refers to the ability of an individual, business, or organization to meet its long-term financial obligations. It’s essentially a measure of financial health and stability. A solvent entity has enough assets or income to cover its debts and continue its operations without defaulting on its obligations.

For businesses, solvency is often assessed by comparing assets to liabilities. If assets exceed liabilities, the business is considered solvent. This can be measured through metrics like the debt-to-equity ratio, which compares a company’s total debt to its total equity.

Solvency is crucial for the sustainability and growth of businesses. It ensures that they can continue to operate, pay off debts, and invest in future endeavors without facing financial distress. Conversely, insolvency occurs when liabilities exceed assets, indicating financial distress and potentially leading to bankruptcy or default.