Solvency: Everything You Need to Know About Financial Solvency in the Saudi

Financial solvency refers to the ability of an organization or individual to meet all their financial obligations when due, while maintaining sufficient financial reserves to cope with any emergencies. In accounting terms, solvency is typically measured through a set of indicators, such as the ratio of assets to liabilities, the ratio of capital to total assets, or the price-to-earnings ratio. The higher these ratios, the stronger the financial position of the entity in question.

Solvency differs from liquidity, as solvency focuses on the ability to meet long-term obligations, while liquidity pertains to the ability to cover short-term obligations. In the Saudi market, solvency takes on a special character due to the strict oversight imposed by regulatory authorities, especially on banks and listed companies, to ensure compliance with financial stability standards. High solvency not only reflects an entity's ability to repay its current debts but also grants it the flexibility to expand, invest in new projects, or even face economic crises without resorting to excessive borrowing or selling assets at low prices.

The Saudi Arabian Monetary Authority (SAMA) and the Capital Market Authority set clear regulations to ensure minimum solvency levels for banks and listed companies in the Saudi market. Among the most prominent of these standards is the Capital Adequacy Ratio for banks, which must not be less than 12% for Tier 1 capital according to global Basel III requirements. For non-banking companies, debt-to-equity ratios, cash coverage ratios, and trading ratios are monitored periodically.

The Saudi market generally features a high average financial solvency, with financial reports for 2024 and 2025 showing an average capital adequacy ratio for Saudi banks at levels of 19.65% to 20.04%, significantly above the regulatory minimum. This reflects the strength of the banking sector and its readiness to face any economic challenges or potential shocks. Industrial companies are preferred to maintain relatively low debt ratios and rely more on financing their operations from retained earnings and equity, which improves their solvency and reduces the risks of bankruptcy or financial distress.

The process of measuring financial solvency relies on specific financial indicators that reflect the financial structure of the company or bank. Some of the most important indicators include:

1. Capital Adequacy Ratio: Often used in the banking sector, it measures the ratio of capital to risk-weighted assets. The higher this ratio, the greater the financial security of the bank.
2. Debt-to-Equity Ratio: A common indicator in industrial companies, indicating the extent to which the company relies on debt to finance its operations. A lower ratio means higher solvency.
3. Interest Coverage Ratio: Indicates the company's ability to cover interest expenses from its operating profits. The higher the ratio, the stronger the solvency.
4. Current Ratio: Measures the company's ability to meet its short-term obligations from current assets.
5. Operating Cash Flow to Debt Ratio: Reflects the company's ability to generate sufficient liquidity from operations to repay its debts.

Collectively, these indicators provide an accurate picture of the financial solvency strength of the company and help assess its ability to continue generating profits and distributing them to shareholders.

Data for 2024-2025 shows that Saudi banks achieved high levels of financial solvency compared to global standards. The average total capital adequacy ratio reached about 19.65% by the end of 2024, rising to 20.04% in the third quarter of 2025, with most major banks such as Al Rajhi Bank and Riyad Bank maintaining ratios between 14% and 17% for Tier 1 capital. This reflects the banks' ability to face financial risks and provide the necessary liquidity for the national economy.

These results are attributed to the cautious policies of Saudi banks, which focus on strengthening capital, retaining a significant portion of annual profits, and diversifying asset portfolios to reduce risks. Additionally, the presence of substantial cash reserves and ongoing government support enhances the stability and solvency of the banking sector, even during periods of economic fluctuations or rising interest rates.

In non-banking companies, especially industrial companies such as cement companies, debt-to-equity ratios, interest coverage ratios, and cash liquidity are among the most important indicators used to evaluate solvency. The cement sector in Saudi Arabia generally features low levels of indebtedness, with most major companies maintaining debt/equity ratios below 0.5 by the end of 2024, reflecting good solvency and low debt risks.

The sector also primarily relies on retained earnings and operating cash flows to finance its projects and expansions, with limited recourse to bank financing. The commitment of companies to a regular dividend distribution policy, while retaining a portion of profits as cash reserves, enhances their solvency and provides additional flexibility in facing market challenges or changes in raw material and energy prices.

Hail Cement Company is one of the major national companies in the Saudi cement sector, listed in the Saudi financial market under symbol 3001 (for more visit Stock Page). The solvency of Hail Cement relies on several factors:

- Low debt-to-equity ratio (below 0.3), indicating a strong financial position.
- Good cash liquidity, with significant cash balances and strong operating cash flow.
- Sustainable dividend distribution exceeding 30-40% of annual profits, reflecting continuous cash generation.
- Moderate price-to-earnings ratio between 9 and 12, within the sector range.

The company combines prudent debt management, measured expansion, and investment in modern technology, enhancing its ability to withstand market fluctuations and maintain solvency. It also benefits from its strategic geographic location and proximity to major demand centers, supporting the stability of its sales. All these indicators make Hail Cement a good example of applying solvency standards in Saudi industrial companies.

Financial solvency plays a pivotal role in determining a company's ability to achieve growth and withstand shocks, as it indirectly affects the stock valuation in the market. Companies with high solvency are generally viewed as less risky, supporting their stock prices and granting them relatively higher price-to-earnings (P/E) multiples. Conversely, companies with weak solvency may experience pressure on their stock prices and higher financing costs.

In the case of Hail Cement, strong solvency has helped maintain its stock price within the range of 10-12 Saudi Riyals in recent years, despite sector challenges. Additionally, the continued distribution of dividends reflects financial stability and increases investor confidence. However, it should be emphasized that high solvency does not necessarily guarantee continued positive performance, as prices are influenced by other factors such as supply and demand, competition, and macroeconomic changes.

Despite the close relationship between solvency and liquidity, they reflect different aspects of the financial health of the entity. Liquidity refers to the company's ability to meet its short-term obligations (usually within one year) and is measured by indicators such as the current ratio and quick ratio. In contrast, solvency focuses on long-term financial sustainability and the ability to face large debts and invest during growth periods.

A company can have high liquidity but weak solvency if its long-term debts are too high compared to equity. Conversely, a company with strong solvency may have low liquidity if its assets are long-term or its investments are illiquid. In the Saudi market, regulators are keen to monitor both indicators to ensure the overall stability of the financial system.

Economic policies and interest rates play an important role in determining solvency levels in the economy. When interest rates rise, the cost of debt increases for companies and banks, which may pressure profits and reduce solvency if there are insufficient cash reserves. Conversely, Saudi banks benefited during 2024-2025 from high-interest policies by increasing profit margins, while industrial companies maintained stable solvency levels due to reliance on self-financing.

Additionally, the stability of oil prices and the increase in foreign reserves held by the Saudi government contribute to enhancing the overall solvency of the economy, providing a financial cushion to support banks and companies in the event of crises or revenue declines. Hence, it is clear that monitoring economic developments and monetary policies is crucial when assessing the solvency of any entity in the local market.

Hail Cement belongs to the Saudi cement sector, which includes major competitors such as Eastern Province Cement (3003), Yamama Cement (3020), Najran Cement (3006), and others. Compared to competitors, Hail Cement shows high financial solvency due to low debt ratios, good liquidity, and consistent distributions.

While some major companies may resort to increasing debt to finance expansions or face operational challenges, Hail Cement prefers a self-financing policy and maintains a low debt/equity ratio. This limits the risks of default and provides greater flexibility in dealing with market fluctuations. However, it is always essential to monitor competitor movements, changes in market share, and operational challenges, as these can affect solvency levels in the future.

The recent period (2024-2025) has witnessed several regulatory developments aimed at enhancing solvency in the Saudi market. Among the most notable are updates to capital adequacy requirements for banks in line with Basel III standards and updates in risk weights for certain sectors such as retail and real estate. Banks have also been encouraged to increase capital through rights issues and enhance cash reserves.

For industrial companies, updates have focused on transparency in disclosing debt ratios, cash flows, and dividend distribution policies. These measures aim to protect investors and ensure business sustainability, reducing the risks of financial distress. Additionally, environmental sustainability initiatives have played an increasing role in determining financing trends, as entities with good environmental performance are encouraged to obtain financing on better terms, enhancing their long-term solvency.

Saudi companies can enhance their financial solvency through several strategies, including:

- Increasing capital through issuing new shares or reinvesting retained earnings.
- Reducing reliance on debt and restructuring loans under the best possible terms.
- Improving operational efficiency and reducing costs, which raises profit margins and increases available liquidity.
- Diversifying income sources through investing in new projects or entering strategic partnerships.
- Committing to balanced dividend distribution policies while retaining a sufficient portion of profits to face emergencies.

Implementing these strategies systematically and disciplined contributes to enhancing solvency and provides the company with the ability to expand and invest confidently while reducing risks associated with economic fluctuations.

Financial solvency at the macroeconomic level reflects the state's ability to meet its financial obligations and ensure the stability of the banking system and major companies. In the Kingdom of Saudi Arabia, substantial foreign reserves (approximately $500 billion by the end of 2024) and a low public debt ratio (less than 30% of GDP) have contributed to enhancing confidence in the national economy and raising the Kingdom's credit rating.

This strength reflects on the government's ability to support banks and companies when needed and provide a stable investment environment that attracts local and foreign capital. Additionally, macroeconomic stability provides a cushion for financing major infrastructure projects (such as Vision 2030 projects), supporting the growth of vital sectors such as cement and construction, and enhancing the solvency of the companies operating within them.