Solvency ratio calculator: equity ratio and debt to equity
Enter your equity and total assets and see your equity ratio, your liabilities and how much debt stands against each unit of equity.
Short answer
Equity ratio = equity ÷ total assets × 100%. With 300,000 of equity on total assets of 800,000, the ratio is 37.5%: the business pays for more than a third of what it owns with its own money. In much of Europe this is what "solvency" means. Some English sources use a cash-flow based solvency ratio instead; both are explained below.
Solvency ratio calculator
Both figures are on the balance sheet. Any currency works.
- Liabilities
- 500,000
- Debt to equity
- 1.67
- Equity ratio (solvency)
- 37.5%
Solvency formulas
| Ratio | Formula | Example |
|---|---|---|
| Equity ratio (solvency) | equity ÷ total assets × 100% | 300,000 ÷ 800,000 = 37.5% |
| Liabilities | total assets − equity | 800,000 − 300,000 = 500,000 |
| Debt to equity | liabilities ÷ equity | 500,000 ÷ 300,000 = 1.67 |
| Debt ratio | liabilities ÷ total assets × 100% | 500,000 ÷ 800,000 = 62.5% |
| Cash-flow solvency ratio | (net profit + depreciation) ÷ liabilities | see below |
The equity ratio and the debt ratio always add up to 100%. Debt to equity says the same thing a different way: how many units of borrowed money stand against each unit of the owners' money.
The cash-flow solvency ratio, common in US finance textbooks, asks whether yearly earnings could pay off the debt: (net profit after tax + depreciation and amortisation) ÷ total liabilities. A business with a net profit of 96,000 and depreciation of 45,000 on 500,000 of liabilities scores 28%. It needs the profit and loss account as well as the balance sheet, which is why the calculator above sticks to the balance sheet ratios.
What is a good solvency ratio?
There is no legal standard. As a rule of thumb, lenders and advisers often treat an equity ratio from roughly 25–30% as healthy and below 20% as vulnerable. Negative equity means liabilities exceed assets.
Compare within your sector. A construction firm with a lot of equipment or a wholesaler with a lot of stock has a large balance sheet and often a lower equity ratio than a consultancy that owns almost nothing. The trend matters too: a ratio that falls three years running says more than a single number.
Worked example: an installation company's balance sheet
A fictional installation company has this balance sheet at year end.
| Assets | Amount | Equity and liabilities | Amount |
|---|---|---|---|
| Premises and vans | 550,000 | Equity | 300,000 |
| Inventory | 70,000 | Mortgage and loan (long-term) | 340,000 |
| Trade receivables | 140,000 | Suppliers, VAT and payroll taxes (current) | 160,000 |
| Cash at bank | 40,000 | ||
| Total | 800,000 | Total | 800,000 |
The equity ratio is 300,000 ÷ 800,000 = 37.5%, and each unit of equity carries 1.67 of debt. Whether the company can also pay its bills in the coming months is a different question, answered by its liquidity and cash flow forecast.
How to improve solvency
- Keep profit in the business. Retained earnings raise equity directly; dividends and large drawings do the opposite.
- Repay debt with surplus cash. If there is more in the bank than you need, repaying debt shrinks the balance sheet and lifts the ratio.
- Subordinated loans. Lenders often count a loan that is repaid after all other creditors as quasi-equity, even though it is a liability in the accounts.
- A leaner balance sheet. Lower stock and faster collection of receivables shrink total assets, as long as the cash released goes towards repaying debt.
Getting the figures from your accounts
Equity and total assets are on the balance sheet in your annual accounts and in the balance sheet report of your accounting software, such as Xero or QuickBooks Online. Take both on the same date, after the closing entries.
Want to see solvency every month instead of once a year? Connect Xero, QuickBooks Online or Exact Online to DigiData and let the AI agent build a financial dashboard with solvency, liquidity and margin side by side. To check a margin, use the margin calculator.
Frequently asked questions
What is the difference between solvency and liquidity?
Solvency is about the long term: could you pay all your debts if you sold everything you own? Liquidity is about the short term: can you pay the bills of the coming months from money that will come in soon? A business can be solvent and still short of cash, for example when its money is tied up in a building.
Can the solvency ratio be negative?
Yes. When equity is negative, for example after several loss-making years, liabilities exceed assets. Lenders and suppliers see that as a serious risk. A subordinated loan from the owner or fresh capital can restore equity.
Does a subordinated loan count as equity?
Not in the accounts, where it is a liability. Many lenders do count it as quasi-equity and calculate an adjusted ratio: (equity + subordinated loan) ÷ total assets.
How often should I calculate solvency?
At least with every set of annual accounts, and more often if a loan agreement sets a minimum equity ratio. A monthly balance sheet from your bookkeeping shows a decline in time, rather than at year end.
Solvency and liquidity, every month
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