Explanation:
Both investors and creditors are concerned with the solvency of a company. Investors want to make sure the company is in good financial standings and can continue to grow, generate profits, and produce dividends. Basically, investors are concerned with receiving a return on their investment and an insolvent company that has too much debt will not be able to generate these types of returns.Creditors, on the other hand, are concerned with being repaid. If companies can’t generate enough revenues to cover their current obligations, they probably won’t be able to pay off new obligations.In a nutshell:
- Solvency is the ability of a company to meet its long-term debts and other financial obligations.
- Solvency is one measure of a company’s financial health, since it demonstrates a company’s ability to manage operations into the foreseeable future.
- Investors can use ratios to analyze a company's solvency.
- When analyzing solvency, it is typically prudent to conjunctively assess liquidity measures as well, particularly since a company can be insolvent but still generate steady levels of liquidity.
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