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This is financial advisor Patrick Munro, discussing what is solvency margin. When investment managers
make a decision as to the risk/reward capability of a company to return dividends to its stockholders
they look at the overall balance sheet of a company, and therefore, look at its solvency;
the fact that it'll be around during a period of time. If a company goes bankrupt it becomes
what's called insolvent. So, solvency margin really is a a margin or a ratio of excess
capital that's left over. In a healthy company there is a lot of excess capital, or a large
solvency margin which would make sure that this company is a good risk to the investor.
If a company is being run on a shoestring there's a very narrow solvency margin; very
narrow room, or margin for error, and therefore, that would not be a good investment risk.
This is Patrick Munro, discussing the differences in solvency margin.