Can a Company Be Solvent but Not Profitable?

by Gail Sessoms

Solvency and profitability are two distinct yet interdependent aspects of a company’s financial health. A solvent company has assets that exceed its liabilities sufficiently to provide for reinvestment in the company’s growth. The standard for profitability requires that income derived from the company’s business activities exceeds the company’s expenses. While a company can be solvent and not profitable, it cannot be profitable without solvency.


Solvency indicates a company’s current and long-term financial health and stability as determined by the ratio of assets to liabilities. A company may be able to cover current or upcoming liabilities by quickly liquidating assets with little business interruption. However, fluctuations over time in the value of assets while the value of liabilities remains unchanged affect asset-to-liability ratios. Solvency impacts a company’s ability to obtain loans, financing and investment capital.


While solvency involves assets and liabilities, profitability involves income and expenses. New businesses work toward reaching a breakeven point, which is the point at which a company generates enough income to pay all of its expenses and begin to show a profit. For the purposes of profitability, income refers only to that generated from your company’s primary business activities, such as selling products or services. Expenses also result from business activities and include resources purchased and used to carry out the activities.

Measuring and Tracking

Solvency ratios help determine the current and long-term solvency of your company. The net worth ratio, which is “assets minus liabilities equals net worth,” uses the owner’s equity in the business to indicate future solvency. The debt/asset ratio divides total liabilities by total assets and determines the amount of debt per dollar of assets owned. Other solvency ratios compare debt to liquid assets, fixed assets or inventory. A balance sheet tracks net worth by listing assets and liabilities over time. Income statements measure profitability by tracking income and expenses over an accounting period. Breakeven analyses predict the point at which a company can generate profit.

Improving Solvency and Profitability

Solvency improves when assets increase and liabilities decrease. However, a company might improve solvency by selling some assets to pay down debt. Increased owner equity improves solvency. Solvency also improves with reinvestment of assets and capital in the business, avoidance of new debt and proper care of existing assets. Although solvency is a prerequisite for profitability, increased profitability improves solvency. Plan for improved profitability by examining income statements and developing an action plan that includes reducing business expenses, creating a marketing plan to generate more customers and researching new markets.

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