Asset adequacy ratio

What does Asset Adequacy Ratio means ? 

The Asset Adequacy ratio (AAR) is a KPI of Credit Risk Management that can measures in percentage terms the impact of the total debts (current liabilities , non-current liabilities plus accruals) over the equity net of shareholdrs receivables and dividends.

TOTAL DEBTS / NET EQUITY'S BOOK VALUE

The AAR (asset adequacy ratio) can be considerd up to a certain extend a warning indicator for the community of creditors in fact several authorities already provide a threshold to be applied as warning indicator for a possible Insolvency because it gives the degree of adequacy of the enterprise on the overall company indebtedness.

On a Credit Risk Management perspective and particularly using the AAR as a KPI for predicting Insolvency risk, it shall be considered that this KPI can vary based on the business industry, economy, and company size but also that it can rapidly change in consideration of macro economic changes.