What Is a Solvency Ratio
A solvency ratio measures a person's ability to meet long-term obligations. It compares net worth to total assets, showing how much of a person's assets truly belong to them after debts. A higher ratio generally indicates stronger financial stability.
Kim's Solvency Ratio Calculation
With a net worth of 85,000 and total assets of 100,000, Kim's solvency ratio is 0.85 or 85%. This means 85% of her assets are funded by equity, while the remaining 15% is funded by liabilities. The formula is net worth divided by total assets.
Interpreting the Result
An 85% solvency ratio suggests a healthy equity cushion relative to total assets. Creditors and analysts often use this metric to gauge long-term financial risk. For deeper context on solvency analysis, see Investopedia's solvency ratio guide.
