Asset cover
A result above one means assets cover what is owed.
Net Worth & Solvency Glossary · Solvency & Courts
The Solvency Ratio in Indian Certification Practice
noun · a label for a group of ratios, not one formula; the certificate question is usually narrower
Definition
A solvency ratio is any of several ratios that measure whether a business or person can meet its long-term obligations from what it owns.
Because the label covers more than one formula, "solvency ratio" on its own rarely tells a reader what was actually computed.
The two forms most often meant
- Net worthTotal assetsThe owners' stakeagainst what the creditors are owed
- Total assetsTotal outside liabilitiesAsset coverwhether what is owned covers what is owed
Same accounts, two different numbers. Which form a document means is the first thing to ask.
Under the label
01The ratios grouped under the solvency label
The most common forms are three. They are computed from the same accounts and do not agree.
The owners' stake
Sometimes net worth ÷ total liabilities. This shows the owners' stake against the creditors'.
Cash earnings against debt
This shows how much of the debt the business's yearly cash earnings cover.
These give different numbers from the same accounts. A condition asking for "a solvency ratio of" a stated level is therefore ambiguous until someone asks which one.
Not the ratio meant here
Insurers are measured on a separate, regulated solvency ratio, which compares the capital they hold with a required margin. That ratio has nothing to do with the tender and certificate usage described here.
Solvency or liquidity: the time horizon
- Near termLiquidityasks whether near-term payments can be met from current assets.
- Over yearsSolvencyasks whether the whole structure can carry its debt over years.
A business can be solvent and still short of cash this month.
On a certificate
02Which ratio a CA computes when certifying solvency
When a chartered accountant certifies solvency, the work is usually narrower than any of these ratios. The usual question is whether a person or business can meet a stated sum on a stated date.
- Establish what is ownedthe assets, as they stand on the date
- Deduct what is owedevery liability against them
- Set aside assets already charged to someone elsethey cannot answer a second claim
- Compare what remains with the sum namedthe figure the document asks about
A test, not a ratio
That is a test, not a ratio, and a solvency certificate says so.
The certificate also names the date the test applies to, because solvency on one day says nothing about the next. How it differs from a bank's own letter is covered in Bank Certificate vs Solvency Certificate: The Difference.
Where a tender genuinely asks for a ratio
The CA computes it from the audited accounts and states the formula used.
A ratio without its definition is a number the reader cannot use.
To work out a solvency ratio from your own figures, a solvency ratio calculator is available among our tools.
Levels
03Levels Indian tender conditions and court filings commonly reference
There is no single "good" solvency ratio. Acceptable levels depend on the industry, the mix of assets and the reader's purpose, and each tender or regulator sets its own. The required level is read from the document that sets it.
Indian tender conditions
Indian tender conditions most often ask for a solvency amount, not a ratio: a certificate for a sum linked to the contract value.
Where a ratio is asked forthe tender document defines it.
Court filings
Court filings work the same way, asking whether a proposed surety is good for a stated amount.
What is testedwhether the surety is good for the amount named.
In both settings
A figurethe sum the document names
A datethe day the test applies to
The practical requirement is a figure and a date. Reading the document for those two before computing anything is what stops a certificate answering the wrong question.
Written by Subham Jhunjhunwala · Reviewed by CA Sundram Gupta
This entry describes Indian practice in general terms. The document that requires the figure governs which measure applies.
Need help with a certificate that uses solvency ratio? See our Solvency Certificate.