What financial metric measures a company's ability to meet its long-term debt obligations and remain financially stable by evaluating the relationship between total assets and tota... What financial metric measures a company's ability to meet its long-term debt obligations and remain financially stable by evaluating the relationship between total assets and total liabilities?
Understand the Problem
The question asks for a financial metric that gauges a company's capacity to handle long-term debt and maintain financial stability. It specifically focuses on the relationship between a company's assets and liabilities to determine if it possesses sufficient assets to cover its long-term debt.
Answer
Solvency ratio.
A solvency ratio measures a company's ability to meet its long-term debt obligations and remain financially stable by evaluating the relationship between total assets and total liabilities.
Answer for screen readers
A solvency ratio measures a company's ability to meet its long-term debt obligations and remain financially stable by evaluating the relationship between total assets and total liabilities.
More Information
Solvency ratios are used by potential lenders to gauge whether a company has enough cash flow to meet its long-term debts.
Tips
A common mistake is confusing solvency ratios with liquidity ratios. Solvency focuses on long-term obligations, while liquidity focuses on short-term obligations.
Sources
- What Is Solvency? Definition, How It Works With Solvency Ratios - investopedia.com
- Solvency Ratios: Definition, Different Types, & Examples - allianz-trade.com
- Solvency Ratio - Overview, How To Compute, Limitations - corporatefinanceinstitute.com
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