Financial Guide for SMEs - SME Corporation Malaysia

Financial Guide for SMEsSolvency RatiosThese ratios indicate the extent to which thebusiness is able to meet all its debt obligationsfrom sources other than cash flow. In essence,it answers the question: If the business suffersfrom reduced cash flow, will it be able tocontinue to meet the debt and interest expenseobligations from other sources? Commonlyused solvency ratios are:HINTThese ratios measureif your business hasadequate long-term cashresources to cover alldebt obligationsLeverage ratio =Total liabilitiesEquityThe leverage (or gearing) ratio indicates the extent to which the business isdependent on debt fi nancing versus equity to fund the assets of the business.Generally speaking, the higher the ratio, the more diffi cult it will be to obtainfuture borrowings.Debt to assets =Total liabilitiesTotal assetsThis measures the percentage of assets being financed by liabilities. Generallyspeaking, this ratio should be less than 1, indicating adequacy of total assetsto fi nance all debt.TIPThese ratios indicate the extent to which the business isable to meet the debt obligations from all sources, otherthan just cash fl ow, as in the case with liquidity ratios25Chapter 2-5 p22-65 Eng.indd 258/15/11 5:01:51 PM