Learn With ETMarkets: ‘Solvency vs Liquidity: Understanding the differences and importance’

Understanding the difference between solvency and liquidity is essential when investing. Liquidity is a company’s ability to meet short-term obligations with liquid assets, while solvency refers to its ability to repay long-term debts. Liquidity ratios, such as the Working Capital Ratio and Acid Test Ratio, give investors an insight into a company’s short-term financial standing. Meanwhile, solvency ratios, such as the Interest Coverage Ratio and Debt to Equity Ratio, measure a company’s long-term financial position. Both ratios are crucial to understand a company’s financial health, and investors should analyze them carefully when making investment decisions.