SOLVENCY

RATIO
(SHORT TERM)
WHAT IS SOLVENCY RATIO?

 Solvency Ratio is a tool to measure the company’s

ability to commit for future payments. The solvency
ratio indicates whether the company is sufficient to
meet its short and long term liabilities.
 The greater the company’s solvency ratio, the lower
is the probability of debt obligations on it.
SHORT TERM SOLVENCY RATIO

 Short term solvency ratio indicates the company’s

current assets divided by the current liabilities.
 Short term solvency ratio is used to judge the present
financial situation of a company by calculating the
assets recently used by the profit or loss made in the
business.
 It has fewer liabilities and more chances of recovering
from debt loss. It can be managed efficiently watching
at the current situation. Therefore, Short term solvency
is always most preferred as it has less chance of cash
loss.
ADVANTAGES

 Financial analysis: Short term solvency ratio is a

good option, where you can understand the
capability of the company in business. It uses only
the current assets and liability pressure is less.
 Operating cycle: Short term solvency ratio
enhances the operation cycle of the company. It
quickly converts current assets into cash. It also
helps with management efficiency.
DISADVANTANGES

 Inventory: Short term solvency includes inventory

in the calculation, which may lead to overestimation
of debt obligations and giving a wrong ratio result.
 Standalone failure: Short term solvency cannot
withstand with huge liabilities and often proceed to
ownership change.
TYPES OF SHORT TERM RATIOS
Main Differences Between Short Term and Long
Term Solvency Ratio

 Short term solvency ratio is used to check the current

financial situation of the market. Long term solvency
checks the overall financial and economical health of
the company.
 Short term solvency is not listed in share markets but
long term solvency is listed in share markets to buy
stock exchange.
 The operation cycle is short in short term solvency
and the operation cycle is long in long term solvency.
 Liability is less in short term solvency and liability is
large in long term solvency.
CONCLUSION
 So, the main difference between short term and
long term solvency ratio is – Short term solvency
ratio indicates the company’s current assets divided
by the current liabilities. Whereas Long term
solvency indicates the company’s net worth divided
by total debt obligation in the market.
THANKYOU