Future Business Leaders of America (FBLA) Agribusiness Practice Test

What does solvency indicate about a business?

1. It is making a profit

2. It can pay all its liabilities

3. It is engaged in high-risk investments

4. It has a high market share

The correct answer is: It can pay all its liabilities

Solvency is a financial metric that indicates a company's ability to meet its long-term debts and financial obligations. When a business is solvent, it means that it has sufficient assets to cover its liabilities. This is crucial for ensuring the long-term viability of the business, as it demonstrates that the company can pay off debts and continue operations without risking insolvency or bankruptcy. By focusing on the capacity to pay all liabilities, solvency provides a clearer picture of financial health beyond just profitability. A company can be profitable but still face solvency issues if it has taken on more liabilities than it can manage. Therefore, the core of solvency is about balancing assets against liabilities, ensuring that the business can sustain itself financially. In contrast, profitability indicates earnings over a specific period, high-risk investments refer to potentially unstable ventures, and market share relates to the portion of market controlled by the business. These concepts are related but do not directly measure the fundamental ability to pay liabilities, which is what solvency specifically assesses.