The extent to which changing trends in key financial ratios of local SMEs can serve as an early warning sign for distress

Abstract

This study analyses the behaviour of insolvent Small and Medium sized Enterprises (SMEs) with their solvent counterparts. Thus also, improving an understanding on the issues that most affect insolvent companies. In the Research two analyses are carried out. The first analysis utilizes financial ratios to determine whether the relationship between insolvent and solvent companies is dissimilar. These include the five standard ratio categories: Liquidity, Profitability, Leverage, Solvency and Activity. While the second part, employs the eleven ratios to insolvent companies for all the years prior to voluntary winding up to determine any trends which led to this situation. The research identifies both a trend and the main struggles for insolvent companies. These findings can potentially serve as a precaution for future SMEs.