Solvency determinations, while relatively simple in theory, are often challenging in practice. The disconnect between historical cost based financial statements and current fair value or fair market value are one example of the challenge. The challenge is increased with the use of multiple measures of solvency, including: balance sheet, cash flow and thin capital. These may, and often do, result in different answers for the same entity.
Experienced practitioners, including the corporate recovery experts within Claro, identify the relevant financial data, the appropriate valuation standards and valuation premise for a given situation to support solvency determinations. Our work in this area is not limited to solvency determinations, but also includes various techniques to monitor for potential solvency or liquidity issues. The utilization of various solvency ratios, and other indicators such as the Altman Z Score, are helpful in identifying and correcting potential issues long before they manifest into a crisis situation.
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