The premise of making investments is to control losses, while healthy growth of the company is to maintain a healthy financial position. Therefore, it is crucial to assess a company's solvency, companies with too weak solvency may even have a bankruptcy crisis due to a broken capital chain. We list the 4 most commonly used indicators to measure the solvency of a company.

1. Gearing ratio

It is an important indicator that measures the ratio of a company's liabilities to assets, representing the company's overall solvency capacity. The formula is divided by total liabilities by total assets. Companies with less heavy assets or cash flow tend to need to stay in business by borrowing debt, so their balance sheet ratios tend to be higher. Companies with lighter assets or better cash flow may have relatively low balance sheet ratios

。 Comparatively, it is better if the balance ratio is less than 50%.

2. Current ratio

This is a measure of a company's short-term solvency by dividing current assets by current liabilities. Current assets are assets that are expected to be realigned within one year, while current liabilities are liabilities that need to be repaid within one year. The current ratio therefore evaluates the coverage multiplier of a company's short-term realizability versus short-term debt. If the company's liquidity ratio is greater than 3, the coverage multiplier is higher and the safety margin is relatively excellent.

3. Speed ratio

This is a more rigorous measure of a company's short-term solvency by dividing current assets over current liabilities. Among them, liquid assets are the part of the assets that remain after excluding inventory and prepayments from current assets. The ability to cash out fast assets is stronger, and therefore higher debt protection. If the company's speed ratio is greater than 2, it is relatively good.

4. Cash ratio

This is the most conservative indicator for evaluating short-term solvency. The calculation formula is divided by cash and its equivalent by current liabilities. Cash in a company's book can be used to repay debts at any time, so it is the most secure. If the corporate cash ratio is greater than 1, it is usually more excellent.

It is worth noting that some companies with abundant cash flows, such as Apple, Starbucks, etc., often use cash for stock repurchases and dividends, resulting in a decline in cash balances, current assets and overall asset levels. Calculated debt indicators may be distorted. Therefore, for some exceptions, we also need specific analysis of specific problems.