Financial Statement lending: Solvency ratio

Solvency ratio arises from debt to total assets. This is the link of total debt in excess of total assets. Solvency ratio, which is a relative amount, determines the proportion of total loan provided by creditors. This solvency ratio also supplies the required specific information about a client’s facility to survive losses without prejudice to creditors’ interest. Thus, when a client has small fraction of debt in relation to its overall assets, the client is seen to be at a vantage point and attractive to creditors considering the amount of shield prior to bankruptcy. Additionally, solvency ratio with small fraction of debt in relation to its overall assets apparently determines a client’s ability to get hold of extra sponsorships (Hunt, Weygandt, Kieso, and Kimmel, 2003, Berger & Udell, 2003).