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CHAPTER - ONE
INTRODUCTION
1.1 Background of the Study
The solvency ratio of an organization gives an insight into the ability of an organization to
meet its financial obligations. Solvency also indicates how much the organization depends on
its creditors and banks can use this when the organization applies for a credit facility. The
solvency ratio is a calculation formula and solvency indicator that demonstrates the
relationship between the various equity components.
Where. Equity is the capital that the entrepreneur has invested in the organization. And Total
assets is the capital that is incorporated in the organization, these are the Equity, the Short-
Term Liabilities (the capital that has to be repaid in the short- term, for instance a supplier’s
credit, creditors or overdraft facility) and the Long-Term Liabilities (long-term liabilities that
can be repaid after more than one year).
In order to determine whether an organization is viable, the outcome should be between
25% and 40%. This is of course dependent on the industry and type of undertaking.
This also says something about the financial is does not

necessarily mean that they are going b

Where, Total Assets is equal to Total
Assets is the sum of assets of an organization. This is divided into current assets (these are the
assets of a person, company or organization in which the capital is contributed for a period of
less than one year). The current assets must be converted into money within one year.
Examples of current assets are stock, receivables and liquid assets) and fixed assets (these are
for example buildings, inventory, machines and plants and vehicles). And Total Liabilities is
equal to Total Liabilities are the total liabilities that are incorporated in the organization, these
are the Short-Term Liabilities and the Long-Term Liabilities.
The higher the outcome in percentages is the more solvent the organization. Solvency ratio is
one of the various ratios used to measure the ability of a company to meet its long-term debts.
Moreover, the solvency ratio quantifies the size of a company’s aftertax income, not counting
non-cash depreciation expenses, as contrasted to the total debt obligations of the firm. Also, it
provides an assessment of the likelihood of a company to continue congregating its debt
obligations.
As stated by Investopedia. acceptable solvency ratios vary from industry to industry.
However, as a general rule of thumb, a solvency ratio higher than 20% is considered to