The solvency position of the firm is studied by calculating Solvency Ratios, which determine the ability of the business to service its debt in the long run. Solvency of business is determined by its ability to meet its contractual obligations towards stakeholders, particularly towards external stakeholders. These ratios are essentially long-term in nature.

The following five ratios are normally computed for evaluating the solvency of the business: 1. Debt-Equity Ratio; 2. Debt to Capital Employed Ratio; 3. Proprietary Ratio; 4. Total Assets to Debt Ratio; 5. Interest Coverage Ratio.

The Debt-Equity Ratio measures the relationship between long-term debt and equity. It is computed as: Debt-Equity Ratio = Long-term Debts ÷ Shareholders' Funds. If the debt component of the total long-term funds employed is small, outsiders feel more secure.

From the security point of view, capital structure with less debt and more equity is considered favourable as it reduces the chances of bankruptcy. Normally, it is considered to be safe if debt-equity ratio is 2:1, though it may vary from industry to industry.

The persons who have advanced money to the business on long-term basis are interested in safety of their periodic payment of interest as well as the repayment of principal amount at the end of the loan period. These ratios help analyse the information contained in financial statements for assessing the solvency of the enterprises.