Solvency Ratio

Solvency Ratio in personal finance is used to determine if you can pay off all your debts by selling your assets in case of a financial emergency. It is measured by comparing your total liabilities against your assets.

It is calculated as below:

SOLVENCY RATIO = NET WORTH/TOTAL ASSETS

where NET WORTH = (TOTAL ASSETS – TOTAL LIABILITIES).

If this ratio is 1, it indicates that you have no liabilities. If this ratio is -ve, it indicates that even if you sell all your assets, you cannot clear your debts/liabilities. If this ratio is less than 1, it indicates that you can successfully clear all your liabilities by selling your assets.

Also learn about Debt to Disposable Income Ratio

Example: Assume that the total value of your assets is Rs.50 lakhs and your total liabilities are worth Rs.20 lakhs. Here the Solvency Ratio is calculated to be 0.6. It means that you can sell your assets and clear all your debts.

Assume that the total value of your assets is Rs.50 lakhs and your total liabilities are worth Rs.60 lakhs. Here the Solvency Ratio is calculated to be -0.2. It means that you have negative net worth and your assets are not enough to clear your liabilities.