Solvency | Definition | Calculation (with Example)

Описание: In this video, we will study the definition of Solvency along with some practical example.

𝐖𝐡𝐚𝐭 𝐢𝐬 𝐒𝐨𝐥𝐯𝐞𝐧𝐜𝐲?
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Solvency is the company's ability to continue its operations for a long time.

𝐍𝐞𝐭 𝐖𝐨𝐫𝐭𝐡 𝐅𝐨𝐫𝐦𝐮𝐥𝐚
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Net Worth Formula = Total Assets – Total Liabilities

𝐒𝐨𝐥𝐯𝐞𝐧𝐜𝐲 𝐄𝐱𝐚𝐦𝐩𝐥𝐞
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Let's say Mr. Ravi wants to invest in a business. His friend told him that investing in this particular company is a very good idea, since the company is doing very well. But Mr. Ravi doesn't know if he has enough money to get into something.

Here's what Mr. Ravi says

Assets –

Cash $60,000
House $300,000
Car $17,000
Other Assets $20,000
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𝐓𝐨𝐭𝐚𝐥 𝐀𝐬𝐬𝐞𝐭𝐬 $397000

Liabilities –

Educational loan for his first child $50,000
Mortgage on the house $120,000
Credit Card Debt $30,000
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𝐓𝐨𝐭𝐚𝐥 𝐋𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬 $200000

Now, Mr. Ravi now wants to know his net value.

By using formula we get,

Net Worth Formula = Total Assets – Total Liabilities
= $397,000 – $200,000
= $197,000

Mr. Ravi is clear from the above calculation whether or not he should invest in a new company right now. Since his net value is positive and he would have a healthy amount in his pocket even after paying off everything he owes, he decides to invest.

To know more about the 𝐒𝐨𝐥𝐯𝐞𝐧𝐜𝐲 you can go to this 𝐥𝐢𝐧𝐤 𝐡𝐞𝐫𝐞 :-
https://www.wallstreetmojo.com/solvency/

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