Solvency Ratio Singapore 2026: What It Measures and Why It Matters Long-Term
The ratio that checks whether a company can survive its debt load, not just pay this month’s bills
The solvency ratio measures a company’s ability to meet its long-term debt obligations using its total assets or cash flow, commonly calculated as (Net Income plus Depreciation) divided by Total Liabilities, and is used by investors and lenders to judge whether a company’s debt load is sustainable over the long run rather than just over the next few months.
Not financial advice. All figures for educational reference only. Data as at October 2026.
- Solvency ratio = (Net Income + Depreciation) ÷ Total Liabilities, expressed as a percentage — generally, above 20% is considered financially healthy.
- Solvency ratios assess long-term survival and debt sustainability, while liquidity ratios like the current ratio assess short-term bill-paying ability.
- A company can be liquid in the short term (able to pay this quarter’s bills) while being insolvent in the long term if its total debt load far exceeds its earnings capacity.
- Highly leveraged sectors in Singapore — including some REITs, shipping trusts and infrastructure businesses — require closer solvency scrutiny due to structurally higher debt levels.
- Credit rating agencies use solvency-style metrics as a core input when assigning or revising a Singapore company’s corporate credit rating.
Table of Contents
What Is Solvency Ratio?
Solvency and liquidity are often confused but measure two different time horizons of financial health. Liquidity ratios, like the current ratio, ask whether a company can meet obligations due in the next 12 months. Solvency ratios ask a longer-term question: can the company realistically service and eventually repay its total debt load using the cash it generates from operations, or using its total asset base if liquidated?
The most common solvency ratio formula takes net income and adds back depreciation (a non-cash charge, similar logic to EBITDA) to approximate cash-generating capacity, then divides this by total liabilities. A higher ratio means a company generates more cash relative to its total debt burden, making it better positioned to service that debt over time. As a general rule of thumb used by credit analysts, a solvency ratio above 20% is considered healthy, while a ratio below 10% can signal elevated long-term financial risk.
In Singapore, solvency analysis matters most for capital-intensive and leveraged sectors — S-REITs (which are required to fund property acquisitions substantially with debt), shipping and offshore marine companies (which carry large vessel financing), and infrastructure or utility businesses. MAS’s leverage limit for S-REITs (currently capped around 50% gearing with an interest coverage ratio condition) is itself effectively a regulatory solvency safeguard designed to prevent REITs from taking on unsustainable debt loads.
How It Works in Singapore
Simplified solvency ratio calculation for a hypothetical SGX-listed industrial company, “Harbour Industries”:
| Line Item | SGD (millions) |
|---|---|
| Net Income | 18.0 |
| Add: Depreciation | 12.0 |
| Cash-generating capacity | 30.0 |
| Total Liabilities | 180.0 |
| Solvency Ratio | 16.7% (30.0 ÷ 180.0) |
Harbour Industries’ solvency ratio of 16.7% sits just below the commonly used 20% healthy threshold, suggesting the company’s debt load is manageable but worth monitoring, particularly if its earnings were to decline or if interest rates rise and increase its debt servicing costs.
Worked Example
A Singapore investor comparing two SGX-listed shipping companies finds Company A has a solvency ratio of 28% while Company B has a solvency ratio of 9%. Both companies carry similar absolute levels of debt relative to their fleet size, but Company A generates much stronger operating cash flow relative to that debt. If freight rates were to fall sharply in a shipping downturn, Company B would have far less cushion to continue servicing its debt obligations, making it the riskier holding of the two from a long-term solvency perspective, even if both companies currently show similar short-term liquidity ratios.
Advantages
- Captures long-term debt sustainability. Solvency ratios look beyond the next 12 months to assess whether a company’s overall debt burden is manageable relative to its earnings power.
- Early warning for credit risk. A deteriorating solvency ratio often precedes a credit rating downgrade or refinancing difficulty, giving investors an early signal.
- Useful for leveraged sector screening. Solvency ratios are particularly valuable when comparing debt-heavy businesses such as REITs, shipping trusts and infrastructure companies.
- Complements liquidity analysis. Pairing solvency ratios with short-term liquidity ratios like the current ratio gives a fuller picture across both time horizons of financial risk.
Risks and Limitations
- Backward-looking. Solvency ratios are based on historical net income and depreciation, which may not reflect a sudden change in a company’s earnings outlook.
- Sensitive to one-off items. A large one-off gain or impairment charge in net income can distort the solvency ratio for a single period without reflecting a genuine change in underlying debt sustainability.
- Varies by acceptable threshold across industries. What counts as a "healthy" solvency ratio for a utility company with stable, regulated cash flows differs from what is healthy for a cyclical shipping or commodity business.
- Does not capture debt maturity structure. A company can have an acceptable solvency ratio overall while facing a dangerous concentration of debt maturities in a single year that creates refinancing risk.
Solvency Ratio vs Liquidity Ratio
| Feature | Solvency Ratio | Liquidity Ratio |
|---|---|---|
| Time horizon | Long-term (years) | Short-term (within 12 months) |
| What it answers | Can the company sustain and eventually repay its total debt? | Can the company pay its bills due in the next year? |
| Formula basis | Net Income + Depreciation, relative to Total Liabilities | Current Assets relative to Current Liabilities |
| Most relevant for | Assessing credit risk and long-term debt sustainability | Assessing immediate cash-flow and bill-paying ability |
| Example ratio | Solvency Ratio, Debt-to-Equity Ratio | Current Ratio, Quick Ratio |
The Bottom Line
Solvency ratios give Singapore investors a long-term lens on whether a company’s debt load is sustainable, complementing short-term liquidity checks that only answer whether bills can be paid this quarter. Investors in debt-heavy sectors — REITs, shipping, infrastructure — should treat solvency analysis as essential, not optional, before committing capital.
Related Terms:
Frequently Asked Questions
What is a solvency ratio?
A solvency ratio measures a company’s ability to meet its long-term debt obligations, typically calculated as (Net Income plus Depreciation) divided by Total Liabilities, with a ratio above 20% generally considered financially healthy.
What is the difference between solvency and liquidity?
Solvency measures a company’s ability to sustain and repay debt over the long term, while liquidity measures its ability to pay bills and obligations due within the next 12 months — a company can be liquid but insolvent, or solvent but temporarily illiquid.
What is considered a good solvency ratio?
As a general guideline used by credit analysts, a solvency ratio above 20% is considered healthy, while a ratio below 10% signals elevated long-term financial risk, though acceptable thresholds vary by industry.
Why do S-REITs need close solvency monitoring?
S-REITs are required by their business model to fund property acquisitions substantially with debt, and MAS imposes a regulatory gearing limit alongside an interest coverage ratio condition specifically to prevent REITs from taking on unsustainable debt loads.
Can a profitable company still have a weak solvency ratio?
Yes — a company can be profitable on its income statement while carrying such a large total debt burden that its earnings and depreciation add-back are insufficient relative to that debt, resulting in a weak solvency ratio despite positive net income.
Disclaimer: This glossary entry is for educational purposes only and does not constitute financial advice. Data sourced from official regulator and industry websites as at October 2026.