What is meant by solvency?

Solvency refers to a company's ability to meet its long-term financial obligations, which encompasses its capacity to pay off debts and other liabilities as they come due over an extended period. This is a critical measure of financial health because it indicates whether a company can sustain operations and remain viable in the long run.

A solvent company possesses sufficient assets to cover its liabilities, meaning it can withstand financial pressures without becoming bankrupt. This is an essential part of evaluating a company's financial stability and longevity, as it ensures that it can honor commitments such as loans, bonds, and other forms of debt that typically extend beyond just a year.

In contrast, managing short-term debts focuses on liquidity rather than solvency. Profitability pertains to a company's capacity to generate income over time, while asset management efficiency relates to how well a company utilizes its assets to earn revenue. These concepts are important, but they do not encapsulate the broader, long-term financial stability signified by solvency.