Solvency is defined as the firm’s potential to carry on business activities in the foreseeable future, to expand and grow. It is the measure of the company’s capability to fulfil its long-term financial obligations when they fall due for payment. A solvent company is one that owns more than it owes; in other words, it has a positive net worth and a manageable debt load. While liquidity ratios focus on a firm’s ability to meet short-term obligations, solvency ratios consider a company’s long-term financial wellbeing.
Liquidity refers to both an enterprise’s ability to pay short-term bills and debts and a company’s capability to sell assets quickly to raise cash.
A company with adequate liquidity will have enough cash available to pay its ongoing bills in the short run.
