Solvency

Solvency asks the long-horizon question: does this company have enough asset value and earning power to satisfy all its obligations over time? A firm is balance-sheet insolvent when liabilities exceed assets, and cash-flow insolvent when it cannot pay debts as they mature regardless of book values. Trade creditors encounter both flavors, and the second one — the liquidity crisis — is usually what triggers the filing, even when the balance sheet still shows positive equity.

Solvency analysis leans on leverage and coverage measures: debt-to-equity, debt-to-tangible-net-worth, interest and fixed-charge coverage, and composite models like the Altman Z-Score. But book solvency deserves skepticism. Asset values on the balance sheet are historical cost, not liquidation value; a company can be solvent at book and deeply insolvent at auction prices. Equity built on goodwill, capitalized development costs, or affiliate receivables offers little real protection.

The distinction matters for credit decisions because remedies differ. A liquidity problem in a solvent company is bridgeable — tighter terms, a payment plan, security — because there is value behind the promise. An insolvency problem is not: every additional shipment increases your loss. Distinguishing the two quickly, using fresh financials and behavior signals together, is one of the highest-value judgments a credit team makes.