Q:

What is the difference between solvency and liquidity?

A:

Quick Answer

Liquidity is the ability of a company or country to meet its near-term cash flow requirements. Solvency is the ability for a company or country to meet its long-term financial obligations.

Continue Reading

Full Answer

Assets are what a company can use to pay for goods and services. Assets may be cash, inventory, property or other financial instruments. Companies use assets to pay for its liabilities.

When a company’s assets are greater than its liabilities it is solvent. In other words, if all of its liabilities were due immediately, it would have enough assets to pay them off.

However, a liquidity issue arises if a company does not have enough cash to pay for its immediate debts. A company that is solvent can typically acquire cash to resolve this liquidity issue by getting a loan against assets or issuing stock.

A company can have liquidity and be insolvent. This occurs if a company has enough cash to meet its near-term debts, but all of its assets are less than the total amount of money owed. A company can sometimes resolve insolvency, particularly if it has liquidity. To do so the company reduces expenses to increase cash flow to eventually have more assets than debts, or the company reduces debts, which may include negotiating with the debt holders to reduce the total amount owed.

Countries are more complex, especially as many can print their own money to address liquidity issues.

Learn more about Financial Calculations

Related Questions

  • Q:

    What are liquidity and solvency ratios?

    A:

    Liquidity ratios refer to a firm's ability to meet its immediate financial obligations in terms of cash on hand and assets that can be sold quickly, while solvency ratios compare a firm's total assets to its total obligations, even into the future. Both are measures of a firm's financial health.

    Full Answer >
    Filed Under:
  • Q:

    By which criteria are investment companies rated?

    A:

    The criteria by which investment companies are rated are leverage, liquidity, cash flow coverage of fixed costs and historical investment performance. They are also rated on the management expertise, "key man" risk, diversification of investments, risk of investment strategies and valuation of investments.

    Full Answer >
    Filed Under:
  • Q:

    What are the five major categories of ratios?

    A:

    The five categories of financial ratios are liquidity (solvency), leverage (debt), asset efficiency (turnover), profitability and market ratios. These ratios measure the return earned on a company’s capital and the profit and expense margins on each of its sales.

    Full Answer >
    Filed Under:
  • Q:

    What are some financial ratios by industry?

    A:

    Financial ratios by industry include debt ratios, liquidity ratios, market value ratios and profitability ratios, notes the Houston Chronicle. The ratios compare a firm's growth and its position in the industry. Ratios can be further divided into price/earnings growth, return on equity ratio and others, explains Forbes.

    Full Answer >
    Filed Under:

Explore