solvency tests

Solvency tests evaluate a company's ability to meet its long-term financial obligations. Essentially, they assess whether a business has enough assets to cover its debts. If a company passes solvency tests, it indicates that it can continue operations and pay back creditors. There are various methods to conduct these tests, such as comparing total assets to total liabilities or assessing cash flow against debt obligations. A solvent company is seen as stable and viable, while insolvency suggests potential financial trouble, leading to bankruptcy or restructuring.