Solvency, on the other hand, measures the ability of a company to meet its long-term debts

and obligations (Hayes, 2021). Some of the most common used financial ratios to measure a
firm’s solvency are long-term debt to equity and total debt to equity. Figure 2 shows the
comparison between the solvency ratio of SMPH and ALI, then compared with the industry
average. First, the long-term debt to equity measures the leverage that a business has taken
on by dividing its long-term debt to shareholders’ equity.

Figure 1 shows the comparison between the liquidity ratio of SMPH and ALI, then compared
with the industry average. First, the current ratio. This ratio measures the company’s ability
to meet its short term obligation as they fall due using their current asset. ALI has a higher
current ratio and is closer to the industry average. This implies that for every PHP1 short-
term liability, SMPH has PHP1.51 while ALI has PHP1.68 to cover the said
obligations.Second,  the acid-test ratio or quick ratio. This ratio measures the company’s
ability to meet its short term obligation as they fall due using their most liquid assets which
excludes inventory. In this ratio, SMPH has a higher calculated ratio and is closer to the
industry average. This implies that for every PHP1 of current liabilities, SMPH has PHP1.06
to cover it, while ALI may not be able to instantly get rid of its current liabilities. Overall, the
industry average is greater than the two liquidity ratios of both companies. 

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