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Solvency measures an entity’s ability to meet its financial obligations. This can be expressed as a ratio of the company’s assets to its liabilities. Solvency is a key measure of financial health that investors look for when they analyze a balance sheet.

A company is solvent if its assets exceed its liabilities. Conversely, it is insolvent if its liabilities exceed its assets. A company that is insolvent can continue operating and generating returns for shareholders. However, insolvent companies are generally riskier as they are more likely to become bankrupt.