Solvency ratio - How to calculate your solvency ratio! Read more here
Learn about solvency ratio and how it measures the financial strength of your business. Understand why a high solvency ratio is important for your online store and the long-term stability of your business
How to improve your online shop's financial stability with a strong solvency ratio
What is solvency ratio?
The solvency ratio is a financial key indicator used to assess a company's financial strength and stability. It expresses the relationship between a company's equity and its total assets. This ratio gives an indication of how much of the company's assets are financed by equity rather than debt. A high solvency ratio is generally a sign of a healthy economy, as it shows that the company is less dependent on external financing and has a solid capital structure.
Application of solvency ratio in accounting
In accounting, the solvency ratio is used to evaluate a company's financial robustness and risk level. Investors, creditors, and other stakeholders often analyze the solvency ratio to assess how well the company can withstand economic downturns and meet its long-term obligations. A high solvency ratio indicates that the company has a strong capital base and is therefore better equipped to handle financial challenges.
For webshops, which often have significant investments in inventory and technology, maintaining a high solvency ratio is essential for stable operations. A webshop with a high solvency ratio will have an easier time securing financing for growth and development, as lenders and investors will view the company as a less risky investment.
How is solvency ratio calculated?
The solvency ratio is calculated by dividing equity by total assets, then multiplying the result by 100 to obtain the percentage. The formula for the solvency ratio is as follows:
Formula:
Solvency Ratio = (Equity / Total Assets) * 100
Here is an example of how the solvency ratio can be calculated in practice:
Example:
Assume a webshop has the following figures on their balance sheet:
- Equity: 500,000 DKK
- Total Assets: 1,200,000 DKK
To calculate the solvency ratio, we use the formula:
Solvency Ratio = (500,000 DKK / 1,200,000 DKK) * 100 = 41.67%
This means that 41.67% of the webshop’s assets are financed by equity, indicating a relatively healthy financial structure.
Importance of solvency ratio for webshops
For webshops, the solvency ratio is particularly important as it can affect the company’s ability to grow and develop. A high solvency ratio gives webshop owners greater flexibility to make strategic decisions without relying on external financing. It can also improve the company’s creditworthiness and negotiation power with suppliers and partners.
Additionally, a high solvency ratio can help build trust among customers and investors, as it signals that the company is well-prepared to handle financial challenges and has a strong financial foundation. This is especially crucial in the competitive e-commerce industry, where trust and stability are often key factors for success.
Learn about solvency ratio and how it measures the financial strength of your business. Understand why a high solvency ratio is important for your online store and the long-term stability of your business