What does 'solvency' measure in a business context?

Solvency in a business context specifically measures a company's ability to meet its long-term debts and financial obligations. This concept is crucial for assessing a company's financial health and stability over the long term. Solvency indicates whether a company's total assets exceed its total liabilities, which is essential for investors and creditors who want to understand the risk associated with lending to or investing in the company.

In practical terms, a solvent company is one that has sufficient assets to cover its long-term liabilities, indicating that it can sustain operations and survive financial challenges. This contrasts with measurements of profitability, market share, or compliance with tax regulations, which focus on different aspects of business performance. Thus, a deeper understanding of solvency helps stakeholders make informed decisions regarding investment and lending opportunities.