What does the term 'solvency' mean?

The term 'solvency' specifically refers to a company's ability to meet its long-term financial obligations. This means that a solvent company possesses sufficient assets to cover its long-term debts and liabilities, ensuring that it can continue to operate over the long run without facing financial distress. Solvency is crucial for assessing the financial health of a business, as it indicates the firm's capacity to honor its debt commitments beyond the short term.

In contrast, other choices provided focus on different financial aspects. The ratio of liabilities to shareholder equity reflects a company's leverage but does not directly address solvency. Measurement of cash flow liquidity pertains to short-term financial health rather than long-term viability. Lastly, total assets minus total liabilities calculates net worth but does not express the ability to meet obligations over time. Thus, the correct choice emphasizes the broader concept of long-term financial stability essential for a business's longevity.