Solvency

Solvency is a company's ability to meet its long-term financial obligations, having enough assets and earning power to cover its debts over time, not just in the next few months.

It's a longer-term companion to liquidity, which asks whether a company can cover what it owes in the near term. A company can be liquid, holding plenty of cash today, while still being fundamentally insolvent if its long-term debts far exceed what the business can ever realistically generate. The reverse is also possible: a solvent company with a healthy balance sheet overall can still run into a short-term liquidity crunch if too much cash is tied up in assets that can't be quickly converted.

Leverage ratios and interest coverage are the most common ways to check solvency, showing whether a company's debt load and the cost of servicing it stay within what its ongoing earnings can comfortably support.