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FT Guide to Using and Interpreting Company Accounts, 4th Edition by Wendy Mckenzie

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9

Solvency

Introduction

When you’re analysing a company, your first concern has to be whether the company is still going to be trading next year. What are the chances of it going into administration? If it looks likely, then doing any further analysis seems a waste of time! So you start financial analysis by looking at a company’s solvency, as this gives you an indication of whether or not it has a long-term future.

A business is solvent when:

  • its assets exceed its total liabilities (this means that it has a positive net worth); 
  • it can pay its debts when they fall due.

I’ll look at solvency on three timescales:

  • ‘Could the company pay all of its short-term liabilities immediately?’ 
  • ‘Will the company be able to meet its short-term obligations?’  ...

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