Solvency
Solvency, in finance or business, is the degree to which the current assets of an individual or entity exceed the current liabilities of that individual or entity.[1] Solvency can also be described as the ability of a corporation to meet its long-term fixed expenses and to accomplish long-term expansion and growth.[2][3] This is best measured using the net liquid balance (NLB) formula. In this formula, solvency is calculated by adding cash and cash equivalents to short-term investments, then subtracting notes payable.[4] There exist cryptographic schemes for both proofs of liabilities and assets, especially in the blockchain space.[5][6][7]
Importance
[edit | edit source]A lender must assess a borrower’s solvency before granting credit. Loan conditions, including the interest rate, depend on the perceived risk. A highly solvent borrower usually receives better terms.
Solvency of individuals
[edit | edit source]European Directive 2014/17/EU introduced a common framework for consumer and mortgage credit. Solvency assessment is now a clear legal requirement for lenders and intermediaries.
The analysis considers income, expenses, assets, and other financial factors. The independent valuation of the financed asset is also part of the process.[8]
Solvency of businesses
[edit | edit source]Solvency is often evaluated through the gross operating surplus shown in the income statement. This indicator, minus expected loan repayments, should remain well above zero. A high level increases the company’s ability to obtain favourable rates.[9]
The financial leverage ratio is another common measure.
Other borrowers and tools
[edit | edit source]For individuals, solvency models often use ratios and predictive scoring tools.
For businesses, lenders rely on financial statements and performance indicators.
See also
[edit | edit source]Notes
[edit | edit source]- ^ Zietlow & Seidner 2007, p. 5
- ^ Gaist 2009, p. 34
- ^ Lua error in Module:Citation/CS1/Configuration at line 2172: attempt to index field '?' (a nil value).
- ^ Zietlow & Seidner 2007, p. 30
- ^ Ji & Konstantinos 2021
- ^ Chalkias et al. 2020
- ^ Dagher et al. 2015
- ^ Lua error in Module:Citation/CS1/Configuration at line 2172: attempt to index field '?' (a nil value).
- ^ Lua error in Module:Citation/CS1/Configuration at line 2172: attempt to index field '?' (a nil value).
References
[edit | edit source]- Lua error in Module:Citation/CS1/Configuration at line 2172: attempt to index field '?' (a nil value).
- Lua error in Module:Citation/CS1/Configuration at line 2172: attempt to index field '?' (a nil value).
- Lua error in Module:Citation/CS1/Configuration at line 2172: attempt to index field '?' (a nil value).
- Lua error in Module:Citation/CS1/Configuration at line 2172: attempt to index field '?' (a nil value).
- Lua error in Module:Citation/CS1/Configuration at line 2172: attempt to index field '?' (a nil value).
External links
[edit | edit source]- File:Wiktionary-logo-en-v2.svg The dictionary definition of solvency at Wiktionary
