Solvency Ratio (Method #1) |
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Figured by taking one's total net worth and dividing it by total assets. This is one measure of the degree of exposure to insolvency, as it shows how much "cushion" you have as protection against insolvency. It gives some indication of the potential to withstand financial problems. The formula to compute the Solvency Ratio (Method #1) is: For example, a married couple with a total net worth of $20,000 and total assets of $79,000 would have a solvency ratio of 25%. (20000 / 79000 = .25, or 25%) This tells us that this married couple could withstand only about a 25% decline in the value of their assets before they would be in danger of insolvency. The low value for this ratio suggests that they should consider working to improve it in the future. | |||
Solvency Ratio (Method #2) |
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Figured by taking the value of one's total assets and dividing it by total liabilities. The formula to compute the Solvency Ratio (Method #2) is: The higher the ratio, the stronger the financial position. As long as this ratio is greater than 1, the family is solvent. For example, a married couple with total assets of $75,000 and total liabilities of $73,000 would have a solvency ratio of 1.027. We arrive at this ratio by dividing 75000 by 73000. Technically, this couple is financially solvent, but their margin for error (i.e., either a decrease in assets or an increase in liabilties) is perilously thin. | |||