Calculating solvency: formula, benchmark and example
Written by Ilias Aarrass5 min read · Published on · Last reviewed on 
In short
You calculate solvency using the formula equity : total capital x 100%. With € 30,000 equity on a balance sheet total of € 80,000, solvency is 37.5 per cent. There is no statutory benchmark; 25 to 40 per cent is often considered healthy, depending on the sector. Solvency is about the long term, liquidity about the short term.
- Formula: equity divided by total capital, multiplied by 100.
- 25 to 40 per cent is often considered healthy, but the benchmark differs by sector.
- All the figures are on your balance sheet; total capital is the balance sheet total.
- Keeping profit in the business and paying off debts raise your solvency most directly.
Solvency is the extent to which your business can meet all its payment obligations in the long term. You calculate it by dividing equity by total capital and multiplying by 100. A result of 25 to 40 per cent is often considered healthy, although the benchmark differs by sector. In this article you will read where to find the figures, how to calculate it, what the result says and how to improve low solvency.
The formula for solvency
The most commonly used formula is: solvency = equity : total capital x 100%. All the figures are on your balance sheet. Total capital is the same as the balance sheet total: everything on the credit side, so equity plus debts.
There is also a second variant: equity : debt x 100%. It compares what is yours with what you owe others. The result is always higher than with the first formula, so check which variant someone means before comparing figures.
| Term | Meaning | Examples |
|---|---|---|
| Equity | Assets minus debts | Money put in plus accumulated profit, minus private withdrawals |
| Debt | Everything you still have to pay others | Suppliers, VAT still payable, long-term debts |
| Total capital | Equity plus debt | The balance sheet total |
Worked example: solvency of a handyman business
Suppose your handyman business has a van worth € 25,000, stock worth € 15,000, € 20,000 in outstanding invoices and € 20,000 in the bank. Against this stand € 30,000 in long-term debt and € 20,000 in short-term debt, such as suppliers and VAT still payable.
Calculating solvency
- Total capital (all assets)
- € 80,000
- Debt (€ 30,000 + € 20,000)
- € 50,000
- Equity (€ 80,000 - € 50,000)
- € 30,000
- Solvency (€ 30,000 : € 80,000 x 100%)
- 37.5%
Result: At 37.5 per cent this business is within the usual range. Using the second formula (€ 30,000 : € 50,000) the result is 60 per cent; that is the same business, simply measured differently.
What is good solvency?
There is no statutory benchmark. 25 to 40 per cent is often considered healthy, but what is reasonable depends on your sector and business. A service provider with few assets can manage with less than a business with lots of machinery or stock. So compare mainly with similar businesses and with your own figures from last year.
| Solvency | What does it say? |
|---|---|
| Negative | Debts exceed assets. Take action immediately. |
| 0 to 25% | Vulnerable: a setback hits hard. |
| 25 to 40% | Often healthy, depending on the sector. |
| Above 40% | Strong: you can absorb a serious setback. |
Difference from liquidity
Solvency is about the long term: can you ultimately pay all your debts? Liquidity is about the short term: can you pay the bills of these months? You can have high solvency and still be short of cash, for example if your money is tied up in a van or in unpaid invoices.
In the example above, liquidity (current ratio) is € 55,000 in current assets : € 20,000 in short-term debt = 2.75. That is more than sufficient. How to look ahead at your cash flows is covered in making a cash flow forecast and improving cash flow.
How to improve your solvency
You make the ratio larger by growing equity or reducing debts. These are the five most practical ways.
- Leave profit in the business and limit your private withdrawals.
- Put your own money into the business. That immediately increases your equity.
- Pay off debts with money currently in the bank. Your balance sheet shrinks and your solvency rises.
- Sell what you do not use, such as surplus stock or a business asset, and use the proceeds to pay off debts.
- Increase your profit by reviewing your margin and rates.
Frequently asked questions
What does solvency mean?
Solvency is your business's ability to pay all its debts in the long term. The higher the percentage, the more of the business has been paid for with its own money.
How do you calculate solvency?
Divide equity by total capital and multiply by 100. With € 30,000 equity on a balance sheet total of € 80,000, solvency is 37.5 per cent.
What is good solvency?
25 to 40 per cent is often considered healthy. There is no statutory benchmark: it depends on your sector, your business and who is looking.
What does negative solvency mean?
Then your debts exceed your assets and your equity is negative. With a sole proprietorship this can be due to high private withdrawals, but it is always a reason to go through your figures with your accountant.
What is a solvency statement?
It is a statement, usually from your bank or accountant, about your financial position. It may be requested for a tender or a business lease, among other things. It is different from the percentage you calculate yourself; ask the party requesting it which form is required.
Sources
- Calculating with solvencyKVK · kvk.nl
- Determine your business's viabilityKVK · kvk.nl
- What is solvency?MKB Servicedesk · mkbservicedesk.nl
Sources checked on
This article provides general information based on the rules known for 2026 and does not replace personal tax advice. For your specific situation, we're happy to take a look with you.
