What is meant by the term solvency and why are stakeholders interested in ratios that measure it?
Solvency refers to the financial position a company has with respect to its ability to pay off long-term obligations as they become due. Stakeholders are interested in determining how "solvent" a particular company is. If a company is solvent, then in the long-run, there is a higher likelihood that they will be able to meet their obligations in the future than if they are currently not solvent. A company that is not solvent will need to either obtain financing (debt or equity) in the future or become more profitable from operations in order to avoid going out of business.
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