Businesses

Debt is not necessarily an indicator of a financial problem; this especially in a professional context. Most companies are obligated to take on a loan if they want to expand or grow. The problem however comes when companies become unable to repay these loans.

We can find two measures that indicate a company’s ability to repay its debt: solvency and liquidity.

Solvency is the proportion of own funds on your total capital. This measures the ability of the company to meet its long-term financial obligations or fixed expenses such as loans. A company that is being maintained with mostly own funds is better protected against ups and downs and is able to give greater security to its debtors that they will be paid back in case of bankruptcy. Outside capital is however needed for growth and expansion of a business.

A second measure is liquidity. Liquidity is the proportion of current assets on the short term debt. It measures the ability of a debtor to repay its debts on short term. Liquidity is therefore a company’s ability to meet its short term obligations.