Solvency in the construction industry
‘Solvency’ describes the ability of a company to service its debts. In very simple terms, to be solvent, the value of a company’s assets must be greater than the sum of its debts.
A company that is not solvent can still continue to operate in the short term, for example, if the company takes on debt with the intention of expanding their operations and growing business. In the short term, they may be unable to service the debt from their existing assets. However, the creditor assumes that increased revenue from the investment will enable the company to service its debts in the longer-term.
Short-term solvency can be measured by the current ratio – calculated by dividing current assets by current liabilities. The solvency ratio can be used to measure longer-term solvency – calculated by dividing the company’s net income + depreciation by its long term and short term liabilities.
In the UK, an insolvent company is one that is unable to service its debts. Insolvent companies may be put into 'liquidation' or 'administration'.
For more information, see Insolvency in the construction industry.
Solvency is not the same as liquidity, which refers to the availability of liquid assets (i.e. cash), and how easy it is for other assets to be converted to cash.
[edit] Related articles on Designing Buildings Wiki
Featured articles and news
Quality Planning for Micro and Small to Medium Sized Enterprises
A CIOB Academy Technical Information sheet.
A briefing on fall protection systems for designers
A legal requirement and an ethical must.
CIOB Ireland launches manifesto for 2024 General Election
A vision for a sustainable, high-quality built environment that benefits all members of society.
Local leaders gain new powers to support local high streets
High Street Rental Auctions to be introduced from December.
Infrastructure sector posts second gain for October
With a boost for housebuilder and commercial developer contract awards.
Sustainable construction design teams survey
Shaping the Future of Sustainable Design: Your Voice Matters.
COP29; impacts of construction and updates
Amid criticism, open letters and calls for reform.
The properties of conservation rooflights
Things to consider when choosing the right product.
Adapting to meet changing needs.
London Build: A festival of construction
Co-located with the London Build Fire & Security Expo.
Tasked with locating groups of 10,000 homes with opportunity.
Delivering radical reform in the UK energy market
What are the benefits, barriers and underlying principles.
Information Management Initiative IMI
Building sector-transforming capabilities in emerging technologies.
Recent study of UK households reveals chilling home truths
Poor insulation, EPC knowledge and lack of understanding as to what retrofit might offer.
Embodied Carbon in the Built Environment
Overview, regulations, detail calculations and much more.
Why the construction sector must embrace workplace mental health support
Let’s talk; more importantly now, than ever.
Ensuring the trustworthiness of AI systems
A key growth area, including impacts for construction.