How do you assess a company’s solvency? What does solvency mean and how do you assess it?
Solvency indicates the extent to which the company belongs to you. Solvency is equity divided by the total capital invested in the company.
Equity and debt together form the total capital. The more debt (for example, from a bank or financier) is present in the company, the lower the solvency.
If you have not borrowed money from the bank and financed the entire company yourself, the solvency is 100%.
Informally, the term “solvent” is sometimes used to mean “being able to pay debts.” Actually, that is incorrect. Entrepreneurs with low solvency can be very “solvent.”
