Knowledge base · Accounting & tax · 5 min leestijd · 2 Sep 2026
Improving solvency: what the ratio really measures
Solvency shows how dependent you are on debt. Banks and investors look at it first. The ratio is simple to work out and is often worked out wrongly. This article sets the formula straight and runs through what you can do about it.
What the solvency ratio measures
Solvency is the relationship between your equity and your total capital. The ratio tells you whether you can meet your obligations over the long term.
equity / total capital x 100% = solvency ratio
Your equity sits on the right-hand side of your balance sheet. Your total capital is the balance sheet total, so equity plus debt.
As a rule of thumb, 25 to 40 per cent is often quoted as healthy. What counts as healthy differs sharply per sector, so compare with your own industry.
Why a shorter balance sheet improves the ratio
There are two routes to a higher ratio. Growing your equity, or shrinking your balance sheet total.
Growing equity takes time. Retaining profit and paying out less dividend does work, but only over financial years.
Shrinking your balance sheet total is quicker. Take money out of stock or receivables and repay debt with it, and you shorten your balance sheet.
With equity unchanged, the ratio rises.
Three items to look at
- Your retained profit. Less dividend and tighter costs raise your equity, but not in the short term.
- Your stock. Stock that is too large is capital fixed in place until it sells. Map out how much you genuinely need.
- Your receivables position. That is usually the largest current asset, and the one quickest to convert.
What factoring does and does not do here
Factoring does not raise your equity. That is a misconception you read often.
What it does do: turn your receivables position into money with which you repay debt. In an off balance sheet structure the receivables item disappears from your balance sheet.
That lowers your balance sheet total and raises your solvency ratio. Whether that holds depends entirely on the accounting treatment.
That question is worked out in factoring and your annual accounts.
Solvency and liquidity are two different things
Solvency is about your capital structure over the long term. Liquidity is about whether you can pay the wages next month.
A business can be solvent and still grind to a halt on its cash. How you measure that side is covered in improving liquidity.
Want to know which form of finance suits your position? Take the quickscan.
About the author
Jaap van Aalst
Commercieel directeur, SOOF Finance
Jaap van Aalst started his first business almost thirty years ago, in staffing and secondment. That is where he saw for himself how many opportunities are lost when money sits too long in unpaid invoices.
Around eighteen years ago he moved into the factoring world, as commercial director. Since then he has sat across the table from countless business owners and seen at first hand what financing questions look like in practice. He looks further than the balance sheet: what the business does, where the opportunities are, and which form of finance genuinely moves it forward.
That is also the basis of his work at SOOF Finance. His starting point is simple: finance is not an end in itself, but a means by which a good entrepreneur delivers on their plans.
Frequently asked questions
As a rule of thumb, 25 to 40 per cent is quoted. Capital-intensive sectors depart from that structurally.
No. Factoring turns receivables into liquidity, so your equity does not change. With off balance sheet treatment your balance sheet total gets shorter, which makes the ratio look different. See factoring and your annual accounts.
Equity divided by total capital, times one hundred per cent. Variants exist, so always state which one you are using.
Further reading: the biggest pitfalls in factoring
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