In finance, solvency is the ability of an entity to pay its debts with available cash. Solvency does not refer to any equation. It is a statement of fact. An entity is solvent until it isn't. But a few financial ratios have been developed to predict problems. Solvency is a different concept from profitability, which refers to the ability to earn a profit. Businesses can be profitable without being solvent (e.g. when they are expanding rapidly). Businesses can be solvent even while losing money (e.g. when they cannibalize future cash flows, like selling accounts receivable). A business is bankrupt when it is unprofitable and insolvent.
