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Solvency Ratio
It is measured to check the ability of a company to meet its debt obligations normally. In this ratio the income of a company is compared with its expenses and total debts, and then the company's ability is judged whether it can meet its debt obligations of not. Solvency ratio is normally measured by the debtor companies to access the ability of a company to return its debts. If a company does not seem able returning the debts, it would not be served with debts. For the calculation of this ratio, after tax net profit and depreciation are added and the result is then divided by the addition of long term liabilities and short term liabilities. In different countries, different methods and formulas are used for the calculation of this ratio. If a company's ratio is equal or more than twenty percent, then such a company would be considered financially strong and capable of returning the debt obligations which are normally called as long term obligations. If the ratio is lower than twenty percent then it means that the company has more chances of default on its long term obligations. Debts are not given to such companies. Twenty percent ratio is not mandatory for all of the financial companies to take as good ratio. Many financial institutions demand more than thirty percent ratio of solvency. The demand of this ratio varies company to company.
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