The solvency ratio, also called the equity ratio, is the most widely used measure of whether a company can carry its debt in the long term. Banks look at it first, and suppliers extending credit to a Belgian customer should do the same. In this article you learn how to calculate the solvency ratio with the formula, the exact codes from Belgian annual accounts, a worked example and the benchmarks to interpret the result.
What is solvency?
Solvency tells you which part of everything a company owns has been paid for with its own money rather than with borrowed money. The higher that share, the bigger the buffer to absorb a bad year, a defaulting customer or a rise in interest rates without the creditors getting into trouble.
Think of a house worth 400,000 euro, bought with 100,000 euro of savings and a 300,000 euro mortgage: your "solvency" is 25%. If the house drops 20% in value, most of your contribution is gone, but the bank still gets its money back. That is exactly the risk a lender wants to assess.
The solvency ratio formula
The most common formula, and the one shown on Jaarrekening.be under the label Solvability, is this one:
Total assets is the balance sheet total: all assets, or, which comes to the same thing, equity plus provisions plus debt.
Some sources divide equity by total debt instead of by total assets. That gives a different number (32% becomes 47%). When comparing ratios from different sources, always check which denominator was used.
Which balance sheet codes do you need?
Belgian annual accounts use a standard chart of account codes that is identical in every format (micro, abbreviated and full). Both figures are on the liabilities side of the balance sheet, so there is nothing to add up yourself:
- Equity: code 10/15. This covers the capital or contribution, the reserves, the profit or loss carried forward and any capital subsidies.
- Total liabilities and equity: code 10/49. This is the balance sheet total, equal to the total of assets (code 20/58).
Not sure where those codes sit? In how to read a Belgian balance sheet we walk through the whole structure of assets and liabilities.
Worked example from a set of annual accounts
Take a Belgian BV/SRL (private limited company), an installation contractor, with this liabilities side on 31 December:
| Liabilities and equity | Code | Amount |
|---|---|---|
| Equity | 10/15 | €320,000 |
| Provisions and deferred taxes | 16 | €30,000 |
| Amounts payable after more than one year | 17 | €250,000 |
| Amounts payable within one year | 42/48 | €400,000 |
| Total liabilities and equity | 10/49 | €1,000,000 |
The calculation: 320,000 / 1,000,000 x 100 = 32%. Almost a third of the company is financed with its own funds, the rest with provisions and debt. For an installation contractor that is a healthy position. The debt ratio is the mirror image: (30,000 + 250,000 + 400,000) / 1,000,000 = 68%. Solvency and debt ratio always add up to 100%, so you only need to calculate one of them.
What is a good solvency ratio?
There is no legal norm. The bands below are the guidelines that banks and credit insurers apply in practice to an average Belgian SME:
| Solvency | Assessment | What it means |
|---|---|---|
| Negative | Alarm bell | Equity is negative: debt exceeds assets. The alarm bell procedure of the Belgian Companies and Associations Code applies, forcing the board to convene the shareholders. |
| < 15% | Weak | Little buffer. One bad year can wipe out equity. Banks ask for extra guarantees or refuse credit. |
| 15% to 25% | Point of attention | Acceptable for a growing or young company, but the trend needs to be upward. |
| 25% to 40% | Healthy | The comfort zone for most banks. The company can absorb setbacks and remains creditworthy. |
| > 40% | Very strong | Very solid, typical of mature companies that have retained profit for years. |
Negative equity deserves a separate mention. It means that accumulated losses exceed everything the shareholders ever contributed. For a BV/SRL, article 5:153 of the Companies and Associations Code obliges the board to convene a general meeting when net assets are negative or threaten to become negative; for an NV/SA (public limited company), article 7:228 does the same when net assets fall below half of the share capital. It is also one of the 5 warning signs of an approaching bankruptcy.
Solvency versus liquidity
The two are often confused, but they answer different questions:
- Solvency looks at the long term: can the company carry its total debt burden, even through a rough patch?
- Liquidity looks at the short term: can the company pay the bills that fall due in the next twelve months?
A company with a beautiful building and little debt can have a solvency of 60% and still be unable to pay its suppliers because all the money is tied up in bricks. Only the two ratios together give the full picture. The usual liquidity measure is the current ratio: current assets divided by short-term debt, with 1 as the minimum. On Jaarrekening.be you find it under Liquidity, next to the quick ratio and working capital.
The cashflow variant of solvency
Alongside the balance sheet formula, credit analysts use a second measure: the debt repayment capacity, calculated as (net profit + depreciation) divided by total debt. It does not say how much of the company's own money is in the business, but how many years of cashflow are needed to repay all debt. Our installation contractor with a cashflow of 90,000 euro and 650,000 euro of debt scores 13.8%, which comes down to about seven years. Use this cashflow variant alongside the balance sheet ratio from this article, not instead of it.
How banks use the solvency ratio
In a credit application, solvency is usually the first figure a credit analyst looks at, even before profit: the shareholders must have enough of their own money in the company before the bank puts its money next to it. Concretely you see this in:
- The own contribution. For an investment loan a bank typically asks for 20 to 30% own funds, precisely to keep solvency at level after the investment.
- Covenants. Larger loans often contain a clause that solvency may not drop below an agreed threshold. If it does, the bank can call the loan or raise the interest rate.
- The interest rate. Higher solvency means less risk for the bank and therefore often a better rate.
Credit insurers and suppliers reason the same way when they set a credit limit for a customer. Anyone who delivers on account is, after all, also a lender.
How to improve the solvency ratio
Because the ratio is a fraction, you can work on the numerator (equity) or on the denominator (balance sheet total). Four levers, applied to our example of 32%:
| Measure | Effect on the balance sheet | New solvency |
|---|---|---|
| Retain profit (do not distribute 50,000 euro) | Equity 370,000, balance sheet total 1,050,000 | 35.2% |
| Capital increase (100,000 euro contribution) | Equity 420,000, balance sheet total 1,100,000 | 38.2% |
| Pay down debt (repay 200,000 euro with cash) | Equity 320,000, balance sheet total 800,000 | 40.0% |
| Subordinated loan (replace 150,000 euro of bank debt with a shareholder loan) | In the accounts it remains debt; banks often count it as quasi-equity | 32% on the balance sheet, 47% in the eyes of the bank |
Retaining profit is the slowest but most sustainable route: it only requires discipline in the dividend policy. A capital increase works immediately, but requires cash from the shareholders and a notarial deed. Paying down debt reduces your cash, so first check whether your current ratio can take it. With a subordinated loan the shareholder accepts that the bank is repaid first if things go wrong; that is why many banks count that amount as quasi-equity, even though it sits under debt on the balance sheet.
Looking up solvency on Jaarrekening.be
You do not have to do the calculation yourself for the companies you do business with. Look up a company through the company search and open the Financial ratios tab. There you find the solvency (labelled Solvability) for every filed financial year, together with equity, short-term and long-term debt and the balance sheet total, so you see the evolution over several years in one chart. On the Summary tab the Health score feeds those figures into a score out of 5, with solvency weighing 40% of the score.
Want to turn the solvency of your own company or a prospect into a score straight away? Use the health score calculator: enter equity, balance sheet total and four other figures and you see the score out of 5.
In summary
Calculating the solvency ratio is simple: equity (code 10/15) divided by total assets (code 10/49), times 100. Above 25% you are in the comfort zone of most banks, below 15% it becomes hard to obtain credit, and negative is an alarm bell. Always read the figure within its sector and its trend, and combine it with liquidity to know whether the company can also pay its bills tomorrow.
