Solvency and Liquidity, both terms are used to define
the financial obligations and the asset conversation ratio of the company, but
the tenure varies as per the terms. The goal of the financial ratio analyzers
is to estimate the debt and financial obligations management capacity of the
company through these reports. Based on these ratios the company can get loans,
collect funds through equity etc. Thus for the financial portfolio of a business these two term are quite important.
What Liquidity ratio implies
The Liquidity ratio is the measure of the company’s
capacity to convert its short term obligations into cash assets. The Liquidity
ratio always refers to the cash inflow which helps meet smaller short term
goals, like paying the immediate bills of the company, and meeting daily day to
expenses at the moment.
With this ratio, it is possible to measure how much capable
the company is at present, and how much revenue they are generating now so that
they can do all transaction in the coming weeks or months. This gives a clear
picture of the present, unlike solvency, which draws the picture of the future.
What solvency ratio implies
Solvency ratios are to measure the ability of the
company to meet its financial debts and liabilities on a longer time, like a
few years or so. This tells about the future of the company, and how it is like
to perform in the coming years, and if it has chancing of growing, improving or
getting into loss or bankruptcy.
The only similarity between the two is that, they both
measure the financial capacity to meet obligations of the company. But the
tenure varies as making it short term analyses for liquidity and long term
analysis for solvency. The Liquidity ratio is important for the company’s
employees, banks and short term lenders, as they would want to know the ability of the business to convert its assets into cash so that it never has difficulty
paying. Solvency deals with the future prospects and is important for
shareholders, banks and loan giving funds to speculate their money’s safety
with the company.
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