Understanding and Interpreting Financial Statements

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What is solvency?

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Solvency represents the ability of a business or individual to meet long-term financial commitments. It is determined when someone's assets are greater than their liabilities.

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Why is being solvent important for a company?

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A solvent company can pay its debts, fulfill financial obligations, and invest in future opportunities, positioning it for potential expansion.

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What is the difference between solvency and liquidity?

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While both measure financial health, solvency focuses on long-term financial commitments, whereas liquidity measures short-term financial stability.

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What does a high solvency ratio indicate?

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A high solvency ratio indicates that a company has more assets than liabilities, suggesting financial stability.

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What is the liquidity ratio?

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The liquidity ratio is calculated as current assets over current liabilities, providing insight into short-term financial stability.

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What does a high debt-to-equity ratio suggest?

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A high debt-to-equity ratio indicates greater financial risk as the company relies more on debt for financing.

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What is the significance of the interest coverage ratio?

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The interest coverage ratio measures how easily a company can cover its interest payments using its operating earnings.

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What does a lower solvency ratio indicate?

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A lower solvency ratio suggests that a company is primarily funded by equity, which is typically less risky.

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What are solvency ratios used for?

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Solvency ratios are used to assess a company's financial stability and ability to meet its long-term obligations.

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What does the solvency ratio measure?

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The solvency ratio measures total assets divided by total liabilities, indicating long-term financial health.