Solvency ratio: how to calculate it, formula and benchmarks

The solvency ratio is calculated by dividing equity by total assets. It shows which share of a company's assets is financed with its own money and how well the business can meet its long-term obligations. For controllers it is the key measure of financial resilience.

Banks, investors and credit insurers look at this percentage before they provide financing. A low solvency ratio signals heavy reliance on debt — and therefore more risk when results disappoint.

What does the solvency ratio mean?

Solvency is the relationship between equity and total capital on the balance sheet. Where liquidity is about the short term (can you pay this month's bills?), solvency is about the long term: will the company survive a few weaker years?

• High solvency: plenty of equity, little debt, room to absorb shocks.
• Low solvency: a lot of debt, higher interest costs and less negotiating room with the bank.

The solvency ratio formula

Solvency ratio (%) = (equity / total assets) × 100

1. Take equity from the balance sheet (paid-in capital, reserves and retained earnings).
2. Take total assets: the sum of all assets.
3. Divide equity by total assets and multiply by 100.

A common variant is the debt-to-equity ratio: liabilities divided by equity. It shows the same relationship, seen from the debt side.

Worked example

A company has total assets of €4,000,000 and equity of €1,200,000.

Solvency ratio = (1,200,000 / 4,000,000) × 100 = 30%.

Item	Amount
Equity	€1,200,000
Liabilities	€2,800,000
Total assets	€4,000,000
Solvency ratio	30%

What is a good solvency ratio?

As a rule of thumb, 25% to 40% is considered healthy, but the benchmark differs strongly by industry. Capital-intensive businesses (real estate, manufacturing) often sit lower because assets serve as collateral; service and software companies usually sit higher. Always compare within your own sector and look at the multi-year trend rather than a single snapshot.

How to improve solvency

• Retain earnings: paying out less dividend grows equity.
• Repay debt: lowering liabilities shrinks both debt and total assets.
• Clean up the balance sheet: dispose of non-productive assets.
• Raise capital: a capital contribution or new shareholder lifts equity immediately.

Solvency in the monthly report

Solvency is often only calculated for the annual accounts, while bank covenants are tested monthly. Include the ratio in your standard reporting set, next to EBITDA and the liquidity ratios, so deviations show up before they become a problem. With multiple entities, calculate it per entity and at consolidated level.

Frequently asked questions about solvency

What is the solvency ratio formula?
Solvency ratio = (equity / total assets) × 100. The result is a percentage.

What is the difference between solvency and liquidity?
Solvency measures the long-term capital structure; liquidity measures whether you can meet short-term payment obligations.

Is a higher solvency ratio always better?
Not necessarily. Very high equity may mean capital is underused; debt is usually cheaper and works as leverage on returns.

What solvency ratio do banks require?
It varies by bank and sector, but corporate financing often requires a minimum of around 25% to 30%, sometimes fixed in a covenant.

Solvency automatically in your reporting

Smartbooks includes solvency, liquidity and return ratios in your reports by default — per entity and consolidated, without spreadsheet work. Book a demo and see it on your own numbers.