In accounting, what does solvency refer to?

Solvency is a critical concept in accounting that refers to a company’s ability to meet its long-term financial obligations. This means assessing whether a company has enough assets to cover its liabilities over an extended period. When evaluating solvency, analysts and investors look at the balance sheet to determine the relationship between total assets and total liabilities.

A company that is solvent can effectively manage its debts and is more likely to continue as a going concern, meaning it can sustain its operations in the long run. Financial ratios, such as the debt-to-equity ratio and the current ratio, help in measuring solvency by illustrating the extent to which a company can fulfill its long-term commitments.

In contrast, the other options provide different facets of a company’s financial health that do not directly relate to solvency. Generating profit pertains to profitability, while meeting short-term obligations relates to liquidity. Sustainability in the market involves factors beyond financial obligations and leans toward competitive strategies and consumer perception. Understanding solvency, therefore, is crucial for stakeholders assessing a company's financial stability and long-term viability.