Under financial condition refers to the ability of an enterprise to finance its activities. It is characterized by the availability of financial resources necessary for the normal functioning of the enterprise, the feasibility of their placement and efficiency of use, financial relationships with other legal entities and individuals, solvency and financial stability.
The financial condition can be stable, unstable and crisis. The ability of an enterprise to make payments on time and to finance its activities on an expanded basis indicates its good financial condition.
Financial condition of the enterprise (FSP) depends on the results of its production, commercial and financial activities. If production and financial plans are successfully implemented, this has a positive effect on the financial position of the enterprise. And vice versa, as a result of underfulfillment of the plan for the production and sale of products, there is an increase in its cost, a decrease in revenue and the amount of profit and, as a result, a deterioration in the financial condition of the enterprise and its solvency
A stable financial position, in turn, has a positive impact on the implementation of production plans and provision of production needs with the necessary resources. Therefore, financial activity as an integral part of economic activity is aimed at ensuring the systematic receipt and expenditure of monetary resources, implementing accounting discipline, achieving rational proportions of equity and borrowed capital and its most efficient use.
The main goal of the analysis is to promptly identify and eliminate shortcomings in financial activities and find reserves for improving the financial condition of the enterprise and its solvency.
Analysis of the financial condition of the organization involves the following stages.
1. Preliminary review of the economic and financial situation of the business entity.
1.1. Characteristics of the general direction of financial and economic activities.
1.2. Assessing the reliability of information in reporting articles.
2. Assessment and analysis of the economic potential of the organization.
2.1. Assessment of property status.
2.1.1. Construction of an analytical net balance.
2.1.2. Vertical balance sheet analysis.
2.1.3. Horizontal balance sheet analysis.
2.1.4. Analysis of qualitative changes in property status.
2.2. Assessment of financial situation.
2.2.1. Liquidity assessment.
2.2.2. Assessment of financial stability.
3. Assessment and analysis of the effectiveness of the financial and economic activities of the enterprise.
3.1. Assessment of production (core) activities.
3.2. Cost-benefit analysis.
3.3. Assessment of the situation on the securities market.
Information basis This methodology consists of a system of indicators given in Appendix 1.
8.1. Preliminary review of the economic and financial situation of the enterprise
The analysis begins with a review of the main performance indicators of the enterprise. This review should consider the following questions:
· property position of the enterprise at the beginning and end of the reporting period;
· operating conditions of the enterprise in the reporting period;
· results achieved by the enterprise in the reporting period;
· prospects for the financial and economic activities of the enterprise.
The property position of the enterprise at the beginning and end of the reporting period is characterized by balance sheet data. By comparing the dynamics of the results of the asset sections of the balance sheet, you can find out trends in changes in property status. Information about changes in the organizational structure of management, the opening of new types of activity of the enterprise, features of working with counterparties, etc. is usually contained in the explanatory note to the annual financial statements. The effectiveness and prospects of the enterprise's activities can be generally assessed based on the analysis of profit dynamics, as well as a comparative analysis of the elements of growth of the enterprise's funds, the volume of its production activities and profits. Information about shortcomings in the operation of an enterprise may be directly present in the balance sheet in an explicit or veiled form. This case may occur when the statements contain items indicating the extremely unsatisfactory performance of the enterprise in the reporting period and the resulting poor financial position (for example, the item “Losses”). The balance sheets of quite profitable enterprises may also contain hidden, veiled items that indicate certain shortcomings in their work.
This can be caused not only by falsifications on the part of the enterprise, but also by the accepted reporting methodology, according to which many balance sheet items are complex (for example, the items “Other debtors”, “Other creditors”).
8.2. Assessment and analysis of the economic potential of the organization
8.2.1. Assessment of property status
The economic potential of an organization can be characterized in two ways: from the position of the property status of the enterprise and from the position of its financial position. Both of these aspects of financial and economic activity are interconnected - an irrational structure of property, its poor quality composition can lead to a deterioration in the financial situation and vice versa.
According to current regulations, the balance is currently compiled in net valuation. However, a number of articles are still regulatory in nature. For ease of analysis, it is advisable to use the so-called compacted analytical balance-net
, which is formed by eliminating the influence on the balance sheet total (currency) and its structure of regulatory items. For this:
· the amounts under the article “Debt of participants (founders) for contributions to the authorized capital” reduce the amount of equity capital and the amount of current assets;
· the value of the receivables and equity capital of the enterprise is adjusted by the amount of the article “Valuation reserves (“Provision for doubtful debts”)”;
· elements of balance sheet items that are homogeneous in composition are combined in the necessary analytical sections (long-term current assets, equity and borrowed capital).
The stability of the financial position of an enterprise largely depends on the feasibility and correctness of investing financial resources in assets.
During the operation of an enterprise, the value of assets and their structure undergo constant changes. The most general idea of the qualitative changes that have taken place in the structure of funds and their sources, as well as the dynamics of these changes, can be obtained using vertical and horizontal analysis of reporting.
Vertical analysis shows the structure of the enterprise's funds and their sources. Vertical analysis allows us to move to relative estimates and conduct economic comparisons of the economic indicators of enterprises that differ in the amount of resources used, to smooth out the impact of inflationary processes that distort the absolute indicators of financial statements.
Horizontal analysis reporting consists of constructing one or more analytical tables in which absolute indicators are supplemented by relative growth (decrease) rates. The degree of aggregation of indicators is determined by the analyst. As a rule, basic growth rates are taken over a number of years (adjacent periods), which makes it possible to analyze not only changes in individual indicators, but also to predict their values.
Horizontal and vertical analyzes complement each other. Therefore, in practice, it is not uncommon to build analytical tables that characterize both the structure of financial statements and the dynamics of its individual indicators. Both of these types of analysis are especially valuable for inter-farm comparisons, as they allow you to compare the reporting of enterprises that differ in type of activity and production volumes.
Criteria qualitative changes The property status of an enterprise and the degree of their progressiveness include such indicators as:
· the amount of economic assets of the enterprise;
· share of the active part of fixed assets;
· wear rate;
· share of quickly realizable assets;
· share of leased fixed assets;
· share of accounts receivable, etc.
Formulas for calculating these indicators are given in Appendix 2.
Let's consider their economic interpretation.
The amount of economic assets at the disposal of the enterprise. This indicator gives a generalized valuation of assets listed on the balance sheet of the enterprise. This is an accounting estimate that does not coincide with the total market valuation of its assets. The growth of this indicator indicates an increase in the property potential of the enterprise.
Share of the active part of fixed assets. The active part of fixed assets refers to machinery, equipment and vehicles. The growth of this indicator in dynamics is usually regarded as a favorable trend.
Wear rate. The indicator characterizes the share of the cost of fixed assets remaining to be written off as expenses in subsequent periods. The ratio is usually used in analysis as a characteristic of the state of fixed assets. The addition of this indicator to 100% (or one) is the coefficient suitability. The depreciation coefficient depends on the adopted methodology for calculating depreciation charges and does not fully reflect the actual depreciation of fixed assets. Likewise, the usefulness ratio does not provide an accurate estimate of their current value. This happens due to a number of reasons: the rate of inflation, the state of the market and demand, the correctness of determining the useful life of fixed assets, etc. However, despite the shortcomings and conventionality of wear and serviceability indicators, they have a certain analytical significance. According to some estimates, a wear rate of more than 50% is considered undesirable.
Renewal factor. Shows what portion of the fixed assets available at the end of the reporting period consists of new fixed assets.
Attrition rate. Shows what part of the fixed assets with which the enterprise began operations in the reporting period was disposed of due to disrepair and other reasons.
8.2.2. Financial position assessment
The financial position of an enterprise can be assessed from the point of view of short-term and long-term prospects. In the first case, the criteria for assessing the financial position are the liquidity and solvency of the enterprise, i.e. the ability to timely and fully make payments on short-term obligations.
Under liquidity any asset understand its ability to be transformed into cash, and the degree of liquidity is determined by the length of the time period during which this transformation can be carried out. The shorter the period, the higher the liquidity of this type of asset.
Talking about liquidity of the enterprise, they mean the presence of working capital in an amount theoretically sufficient to repay short-term obligations, even if in violation of the repayment terms stipulated by the contracts.
Solvency means that the enterprise has cash and cash equivalents sufficient to pay accounts payable requiring immediate repayment. Thus, the main signs of solvency are: a) the presence of sufficient funds in the current account; b) absence of overdue accounts payable.
It is obvious that liquidity and solvency are not identical to each other. Thus, liquidity ratios may characterize the financial position as satisfactory, but in essence this assessment may be erroneous if current assets have a significant share of illiquid assets and overdue receivables. We present the main indicators that allow us to assess the liquidity and solvency of an enterprise.
The amount of own working capital. Characterizes that part of the enterprise's equity capital that is the source of covering its current assets (i.e. assets with a turnover of less than one year). This is a calculated indicator that depends both on the structure of assets and on the structure of sources of funds. The indicator is especially important for enterprises engaged in commercial activities and other intermediary operations. All other things being equal, the growth of this indicator in dynamics is considered as a positive trend. The main and constant source of increasing equity is profit. It is necessary to distinguish between “working capital” and “own working capital”. The first indicator characterizes the assets of the enterprise (Section II of the assets of the balance sheet), the second - the sources of funds, namely the part of the enterprise's own capital, considered as a source of covering current assets. The amount of own working capital is numerically equal to the excess of current assets over current liabilities. A situation is possible when the value of current liabilities exceeds the value of current assets. The financial position of the enterprise in this case is considered as unstable; immediate measures are required to correct it.
Maneuverability of functioning capital. Characterizes that part of own working capital that is in the form of cash, i.e. funds with absolute liquidity. For a normally functioning enterprise, this indicator usually varies from zero to one. All other things being equal, the growth of the indicator in dynamics is considered as a positive trend. An acceptable indicative value of the indicator is established by the enterprise independently and depends, for example, on how high its daily need for available cash resources is.
Current ratio. Gives a general assessment of asset liquidity, showing how many rubles of current assets account for one ruble of current liabilities. The logic for calculating this indicator is that the company pays off short-term liabilities mainly at the expense of current assets; therefore, if current assets exceed current liabilities, the enterprise can be considered to be operating successfully (at least in theory). The value of the indicator can vary by industry and type of activity, and its reasonable growth in dynamics is usually considered as a favorable trend. In Western accounting and analytical practice, the lower critical value of the indicator is given - 2; however, this is only an indicative value, indicating the order of the indicator, but not its exact normative value.
Quick ratio. The indicator is similar to the current ratio; however, it is calculated over a narrower range of current assets. The least liquid part of them - industrial reserves - is excluded from the calculation. The logic of such an exception consists not only in the significantly lower liquidity of inventories, but, what is much more important, in the fact that the funds that can be gained in the event of a forced sale of inventories can be significantly lower than the costs of their acquisition.
The approximate lower value of the indicator is 1; however, this assessment is also conditional. When analyzing the dynamics of this coefficient, it is necessary to pay attention to the factors that determined its change. So, if the increase in the quick ratio was mainly due to growth. unjustified receivables, then this cannot characterize the activity of the enterprise from a positive side.
Absolute liquidity (solvency) ratio is the most stringent criterion for the liquidity of an enterprise and shows what part of short-term borrowed obligations can be repaid immediately if necessary. The recommended lower limit of the indicator given in Western literature is 0.2. Since the development of industry standards for these coefficients is a matter of the future, in practice it is desirable to analyze the dynamics of these indicators, supplementing it with a comparative analysis of available data on enterprises that have a similar orientation of their economic activities.
The share of own working capital in covering inventories. Characterizes that part of the cost of inventories that is covered by its own working capital. Traditionally, it is of great importance in analyzing the financial condition of trading enterprises; the recommended lower limit of the indicator in this case is 50%.
Inventory coverage ratio. It is calculated by correlating the value of “normal” sources of inventory coverage and the amount of inventory. If the value of this indicator is less than one, then the current financial condition of the enterprise is considered unstable.
One of the most important characteristics of the financial condition of an enterprise is the stability of its activities in the light of a long-term perspective. It is related to the overall financial structure of the enterprise, the degree of its dependence on creditors and investors.
Financial stability in the long term, it is characterized, therefore, by the ratio of own and borrowed funds. However, this indicator provides only a general assessment of financial stability. Therefore, a system of indicators has been developed in global and domestic accounting and analytical practice.
Equity concentration ratio. Characterizes the share of the owners of the enterprise in the total amount of funds advanced for its activities. The higher the value of this coefficient, the more financially sound, stable and independent of external loans the enterprise is. An addition to this indicator is the concentration ratio of attracted (borrowed) capital - their sum is equal to 1 (or 100%).
Financial dependency ratio. It is the inverse of the equity concentration ratio. The growth of this indicator in dynamics means an increase in the share of borrowed funds in the financing of the enterprise. If its value drops to one (or 100%), this means that the owners are fully financing their enterprise.
Equity capital agility ratio. Shows what part of equity capital is used to finance current activities, i.e. invested in working capital, and what part is capitalized. The value of this indicator can vary significantly depending on the capital structure and industry of the enterprise.
Long-term investment structure coefficient. The logic for calculating this indicator is based on the assumption that long-term loans and borrowings are used to finance fixed assets and other capital investments. The ratio shows what part of fixed assets and other non-current assets is financed by external investors.
Long-term leverage ratio. Characterizes the capital structure. The growth of this indicator in dynamics is a negative trend, meaning that the company is increasingly dependent on external investors.
Ratio of own and borrowed funds. Like some of the above indicators, this ratio provides the most general assessment of the financial stability of an enterprise. It has a fairly simple interpretation: its value, for example, equal to 0.178, means that for every ruble of own funds invested in the assets of the enterprise, there are 17.8 kopecks. borrowed money. The growth of the indicator in dynamics indicates the increasing dependence of the enterprise on external investors and creditors, i.e. about some decrease in financial stability, and vice versa.
There are no uniform normative criteria for the considered indicators. They depend on many factors: the industry of the enterprise, the principles of lending, the existing structure of sources of funds, turnover of working capital, the reputation of the enterprise, etc. Therefore, the acceptability of the values of these coefficients, assessments of their dynamics and directions of change can only be established as a result of comparison by groups.
8.3. Assessment and analysis of the effectiveness of financial and economic activities
8.3.1. Business activity assessment
Business activity assessment is aimed at analyzing the results and effectiveness of current core production activities
An assessment of business activity at a qualitative level can be obtained by comparing the activities of a given enterprise and related enterprises in the area of investment of capital. Such “qualitative” (i.e. non-formalized) criteria are: the breadth of markets for products; the availability of products exported; the reputation of the enterprise, expressed, in particular, in the fame of clients using the services of the enterprise, etc. Quantitative assessment is done in two directions :
· the degree of fulfillment of the plan (established by a higher organization or independently) in terms of key indicators, ensuring the specified rates of their growth;
· level of efficiency in using enterprise resources.
To implement the first direction of analysis, it is also advisable to take into account the comparative dynamics of the main indicators. In particular, the following ratio is optimal:
T pb > T r > T ak >100%,
where T pb > T r -, T ak - respectively, the rate of change in profit, sales, advanced capital (Bd).
This dependence means that: a) the economic potential of the enterprise increases; b) compared to the increase in economic potential, the volume of sales increases at a faster rate, i.e. enterprise resources are used more efficiently; c) profit increases at a faster pace, which, as a rule, indicates a relative reduction in production and distribution costs.
However, deviations from this ideal dependence are also possible, and they should not always be considered as negative; such reasons are: the development of new prospects for the application of capital, the reconstruction and modernization of existing production facilities, etc. This activity is always associated with significant investments of financial resources, which for the most part do not provide immediate benefits, but in the future can fully pay off.
To implement the second direction, various indicators can be calculated that characterize the efficiency of use of material, labor and financial resources. The main ones are production, capital productivity, inventory turnover, operating cycle duration, and advanced capital turnover.
At analysis of working capital turnover Particular attention should be paid to inventories and accounts receivable. The less the financial resources in these assets are deadened, the more efficiently they are used, the faster they turn over, and the more they bring new profits to the enterprise.
Turnover is assessed by comparing the average balances of current assets and their turnover for the analyzed period. Turnovers when assessing and analyzing turnover are:
· for inventories – costs of production of sold products;
· for accounts receivable – sales of products by bank transfer (since this indicator is not reflected in the reporting and can be identified from accounting data, in practice it is often replaced by an indicator of sales revenue).
Let us give an economic interpretation of turnover indicators:
· turnover in revolutions indicates the average number of turnovers of funds invested in assets of this type during the analyzed period;
· turnover in days indicates the duration (in days) of one turnover of funds invested in assets of this type.
A generalized characteristic of the duration of the death of financial resources in current assets is operating cycle time indicator, i.e. how many days on average pass from the moment funds are invested in current production activities until they are returned in the form of revenue to the current account. This indicator largely depends on the nature of production activities; its reduction is one of the main internal tasks of the enterprise.
Indicators of the efficiency of using individual types of resources are summarized in indicators of equity capital turnover and fixed capital turnover, characterizing, respectively, the return on investment in the enterprise: a) the owner’s funds; b) all means, including those involved. The difference between these ratios is due to the degree of borrowing to finance production activities.
General indicators for assessing the efficiency of using an enterprise's resources and the dynamism of its development include the resource productivity indicator and the coefficient of sustainability of economic growth.
Resource productivity (turnover ratio of advanced capital). Characterizes the volume of products sold per ruble of funds invested in the activities of the enterprise. The growth of the indicator in dynamics is considered as a favorable trend.
Economic growth sustainability coefficient. Shows the average rate at which an enterprise can develop in the future, without changing the already established relationship between various sources of financing, capital productivity, production profitability, dividend policy, etc.
8.3.2. Profitability assessment
The main indicators of this block, used in countries with market economies to characterize the return on investment in a particular type of activity, include return on capital advanced And return on equity. The economic interpretation of these indicators is obvious - how many rubles of profit account for one ruble of advanced (own) capital. The calculation of these indicators is given enough attention in topic No. 7.
8.3.3. Assessment of the situation on the securities market
This type of analysis is performed in companies registered on stock exchanges and listing their securities there. Analysis cannot be performed directly on financial statement data - additional information is needed. Since the terminology for securities in our country has not yet been fully developed, the given names of indicators are conditional.
Earnings per share. It is the ratio of net profit reduced by the amount of dividends on preferred shares to the total number of ordinary shares. It is this indicator that significantly influences the market price of shares. Its main drawback in analytical terms is spatial incomparability due to the unequal market value of shares of different companies.
Share value. It is calculated as the quotient of the stock's market price divided by its earnings per share. This indicator serves as an indicator of demand for shares of a given company, since it shows how much investors are currently willing to pay for one ruble of earnings per share. The relatively high growth of this indicator over time indicates that investors expect faster profit growth for this company compared to others. This indicator can already be used in spatial (interfarm) comparisons. Companies that have a relatively high value of the economic growth sustainability coefficient are, as a rule, characterized by a high value of the “share value” indicator.
Dividend yield of a stock. Expressed as the ratio of the dividend paid on a stock to its market price. In companies that expand their activities by capitalizing most of their profits, the value of this indicator is relatively small. The dividend yield of a stock characterizes the percentage return on capital invested in the company's shares. This is a direct effect. There is also an indirect one (income or loss), expressed in a change in the market price of the shares of a given company.
Dividend output. Calculated by dividing the dividend paid by the stock by the earnings per share. The most clear interpretation of this indicator is the share of net profit paid to shareholders in the form of dividends. The value of the coefficient depends on the investment policy of the company. Closely related to this indicator is the profit reinvestment coefficient, which characterizes its share aimed at developing production activities. The sum of the values of the dividend yield indicator and the profit reinvestment ratio is equal to one.
Share price ratio. It is calculated by the ratio of the market price of a stock to its book price. The book price characterizes the share of equity capital per share. It consists of the par value (i.e. the value stamped on the form of the share at which it is accounted for in the share capital), the share of issue profit (the accumulated difference between the market price of shares at the time of sale and their par value) and the share accumulated and invested in development of the company's profits. A value of the quotation ratio greater than one means that potential shareholders, when purchasing a share, are willing to give a price for it that exceeds the accounting estimate of the real capital per share at the moment.
In the process of analysis, strictly determined factor models can be used, allowing one to identify and give a comparative description of the main factors that influenced the change in a particular indicator .
The above system is based on the following strictly determined factor dependence:
Where KFZ- coefficient of financial dependence, VA- the amount of assets of the enterprise, SK- equity.
From the presented model it is clear that return on equity depends on three factors: profitability of economic activities, resource productivity and the structure of advanced capital. The significance of the identified factors is explained by the fact that they, in a certain sense, summarize all aspects of the financial and economic activities of the enterprise, in particular the financial statements: the first factor summarizes Form No. 2 “Profit and Loss Statement”, the second - the balance sheet asset, the third - the balance sheet liability.
8.4. Determination of an unsatisfactory balance sheet structure of an enterprise
Currently, most Russian enterprises are in difficult financial condition. Mutual non-payments between business entities, high tax and bank interest rates lead to the fact that enterprises become insolvent. An external sign of the insolvency (bankruptcy) of an enterprise is the suspension of its current payments and the inability to satisfy the demands of creditors within three months from the date of their due date.
In this regard, the issue of assessing the balance sheet structure becomes particularly relevant, since decisions on the insolvency of an enterprise are made upon recognition of the unsatisfactory structure of the balance sheet.
The main purpose of conducting a preliminary analysis of the financial condition of an enterprise is to substantiate the decision to recognize the balance sheet structure as unsatisfactory, and the enterprise as solvent in accordance with the system of criteria approved by Decree of the Government of the Russian Federation of May 20, 1994 No. 498 “On certain measures to implement insolvency legislation ( bankruptcy) of enterprises." The main sources of analysis are f. No. 1 “Balance sheet of the enterprise”, f. No. 2 “Profit and Loss Statement.”
Analysis and assessment of the structure of the enterprise's balance sheet is carried out on the basis of indicators: current liquidity ratio; equity ratio.
The basis for recognizing the structure of the balance sheet of an enterprise as unsatisfactory, and the enterprise as insolvent, is one of the following conditions:
the current liquidity ratio at the end of the reporting period is less than 2; (K tl);
the equity ratio at the end of the reporting period is less than 0.1. (To oss).
The main indicator characterizing whether an enterprise has a real opportunity to restore (or lose) its solvency during a certain period is the coefficient of restoration (loss) of solvency. If at least one of the coefficients is less than the standard ( To tl<2, а K oss<0,1), то рассчитывается коэффициент восстановления платежеспособности за период, установленный равным шести месяцам.
If the current liquidity ratio is greater than or equal to 2, and the equity ratio is greater than or equal to 0.1, the loss of solvency ratio is calculated for a period set to three months.
Solvency recovery ratio By sun is defined as the ratio of the estimated current liquidity ratio to its standard. The estimated current liquidity ratio is defined as the sum of the actual value of the current liquidity ratio at the end of the reporting period and the change in the value of this ratio between the end and the beginning of the reporting period, recalculated for the period of restoration of solvency, set equal to six months:
,
Where K NTL- standard value of the current liquidity ratio,
K NTL= 2;6 - period of restoration of solvency for 6 months;
T - reporting period, months.
The solvency restoration coefficient, which takes a value greater than 1, indicates that the enterprise has a real opportunity to restore its solvency. The solvency restoration coefficient, which takes a value less than 1, indicates that the enterprise has no real opportunity to restore solvency in the next six months.
The loss of solvency coefficient K y is defined as the ratio of the calculated current liquidity ratio to its established value. The estimated current ratio is defined as the sum of the actual value of the current ratio at the end of the reporting period and the change in the value of this ratio between the end and the beginning of the reporting period, recalculated for the period of loss of solvency, set equal to three months:
,
Where That- period of loss of solvency of the enterprise, months.
The calculated coefficients are entered into the table (Table 29), which is available in the appendices to the “Methodological provisions for assessing the financial condition of enterprises and establishing an unsatisfactory balance sheet structure.”
Table 29
Assessing the structure of an enterprise's balance sheet
|
Indicator name |
At the beginning of the period |
At the time of establishing solvency |
coefficient |
|
|
Current ratio |
At least 2 |
|||
|
Own funds ratio |
Not less than 0.1 |
|||
|
The coefficient of restoration of solvency of the enterprise. According to this table, calculation using the formula: |
Not less than 1.0 |
|||
|
The coefficient of loss of solvency of the enterprise. According to this table, calculation according to the formula: line 1gr.4+3: T (line 1gr.4-tr.1gr.Z), where T takes values of 3, 6, 9 or 12 months |
Questions for self-control
1. What is the procedure for analyzing the financial condition of an enterprise?
2. What are the sources of information for analyzing financial condition?
3. What is the essence of vertical and horizontal analysis of an enterprise’s balance sheet?
4. What are the principles of constructing an analytical balance - net?
5. What is the liquidity of an enterprise and how does it differ from its solvency?
6. On the basis of what indicators is the liquidity analysis of an enterprise carried out?
7. What is the concept and assessment of the financial stability of an enterprise?
8. What indicators are used to analyze the business activity of an enterprise?
9. Under what conditions are solvency recovery rates calculated?
| Previous |
The Bekmology knowledge base contains a huge amount of materials in the field of business, economics, management, various issues of psychology, etc. The articles presented on our website are only a tiny part of this information. It makes sense for you, a casual visitor, to familiarize yourself with the concept of Backmology, as well as the contents of our knowledge base.
Financial condition is an economic category that reflects the state of capital in the process of its circulation and the ability of a business entity to self-development at a fixed point in time, i.e. opportunity to finance your activities. In the process of operational, investment and financial activities, a continuous process of capital circulation occurs, the structure of funds and sources of their formation, the availability and need for financial resources and, as a consequence, the financial condition of the enterprise, the external manifestation of which is solvency, change.
The financial condition of an enterprise depends on the availability of financial resources necessary for its normal functioning, the appropriateness of their placement and efficiency of use, financial relationships with other legal entities and individuals, solvency and financial stability, as well as on the effectiveness of the operational, financial and other activities of the enterprise. At the same time, the financial condition of the enterprise is influenced by production factors (indicators of intensive and extensive use of production capacity), organizational factors (balance of management structures), circulation factors (management of receivables and payables, reliability of suppliers, etc.).
Indicators of financial condition reflect the availability, placement and use of financial resources. By analyzing the financial condition of business entities, an objective assessment of financial stability is achieved, on the basis of which it is possible to timely determine the likelihood of bankruptcy and calculate the efficiency of using financial resources.
Groups of indicators characterizing the financial condition of an enterprise are solvency, liquidity, financial stability, profitability, business activity and analysis of cash flows in the enterprise.
The financial condition can be stable, unstable (pre-crisis) and crisis. The ability of an enterprise to make payments on time, finance its activities on an expanded basis, withstand unexpected shocks and maintain its solvency in adverse circumstances indicates its stable financial condition, and vice versa.
The financial situation can be characterized both in the short and long term. In the first case, they talk about the liquidity and solvency of a commercial organization, in the second case, about its financial stability.
The financial condition of enterprises and its stability largely depend on the optimal structure of capital sources and on the optimal structure of the enterprise’s assets and, first of all, on the ratio of fixed and working capital, as well as on the balance of the enterprise’s assets and liabilities on a functional basis.
If current solvency is an external manifestation of the financial condition of an enterprise, then financial stability is its internal side, ensuring stable solvency in the long term, which is based on the balance of assets and liabilities, income and expenses, positive and negative cash flows.
The essence of financial sustainability is determined by the effective formation, distribution and use of financial resources.
The financial stability of an enterprise is the ability of a business entity to function and develop, to maintain a balance of its assets and liabilities in a changing internal and external environment, guaranteeing its solvency and investment attractiveness in the long term within the acceptable level of risk. A stable financial condition is achieved with adequacy of equity capital, good quality of assets, a sufficient level of profitability taking into account operational and financial risk, adequacy of liquidity, stable income and ample opportunities to attract borrowed funds.
The sustainability of an enterprise is influenced by various factors: the position of the enterprise in the product market; production and release of cheap, high-quality products that are in demand on the market; its potential in business cooperation; degree of dependence on external creditors and investors; presence of insolvent debtors; efficiency of economic and financial transactions, etc.
One of the indicators characterizing the financial position of an enterprise is its solvency, that is, the ability to timely repay one’s payment obligations with cash resources, the willingness to repay accounts payable when payment is due due to current cash receipts. At the same time, an enterprise is considered solvent when it is able to timely and fully fulfill payment obligations arising from trade, credit and other transactions of a monetary nature, selling current assets. Solvency analysis, carried out on the basis of balance sheet data, is necessary not only for the enterprise for the purpose of assessing and forecasting financial activities, but also for external investors (for example, banks). Taking this into account, solvency affects the ability to attract external sources of funds.
When characterizing solvency, it is necessary to take into account the availability of funds in bank accounts, in the cash register of the enterprise, losses, overdue receivables and payables, and loans not repaid on time. At the same time, solvency affects the forms and conditions of commercial transactions. Improving the solvency of an enterprise is inextricably linked with a working capital management policy, which is aimed at minimizing financial obligations.
The assessment of solvency on the balance sheet is based on the characteristics liquidity current assets, which is determined by the time required to convert them into cash.
Balance sheet liquidity is the ability of a business entity to convert assets into cash and pay off its payment obligations, or more precisely, it is the degree to which the enterprise’s debt obligations are covered by its assets, the period of conversion of which into cash corresponds to the period of repayment of payment obligations.
Liquidity must be viewed from two perspectives: as the time required to sell an asset, and as the amount received from its sale. It should be taken into account that assets can be sold in a short time, but with a significant discount in price.
When analyzing balance sheet liquidity, a comparison is made of assets grouped by the degree of their liquidity with liabilities grouped by their maturity dates.
A lack of short-term liquidity may mean that a business is unable to take advantage of business opportunities when they arise (for example, obtaining favorable discounts). Thus, a low level of liquidity leads to a lack of free action by the enterprise administration. The consequence of illiquidity is the inability of an enterprise to pay its current debts and fulfill current obligations, which can lead to the forced sale of long-term financial investments and assets, and, in extreme form, to non-payments and bankruptcy. The basis for declaring an enterprise bankrupt is failure to comply with the requirements of legal entities and individuals who have financial and property claims against it. Thus, the calculation and analysis of liquidity ratios makes it possible to identify the degree to which current liabilities are covered by financial resources.
The concepts of solvency and liquidity are very close, but the second is more capacious. Its solvency depends on the degree of liquidity of the enterprise's balance sheet. Liquidity analysis consists of comparing funds for an asset, grouped by the degree of decreasing liquidity, with short-term liabilities for a liability, which are grouped according to the degree of urgency of their repayment.
Along with absolute indicators, relative indicators are calculated to assess liquidity and solvency. These indicators are of interest not only to management, but also to external subjects of analysis: absolute liquidity ratio for suppliers of raw materials and materials, current liquidity for investors.
One of the main tasks of analyzing the financial and economic condition of an enterprise is to study the indicators characterizing it financial stability, which is determined by the degree of provision of inventories and costs with own and borrowed sources of their formation, the ratio of the volumes of own and borrowed funds when financing inventories and costs and is characterized by a system of absolute and relative indicators. At the same time, absolute indicators characterize the structure of the enterprise’s own, attracted and borrowed funds in monetary units. Relative indicators make it possible to identify the relationship between the availability of own, borrowed and attracted funds and the direction of their use and are characterized by the coefficient of provision of own working capital, the coefficient of provision of inventories with own funds, the coefficient of maneuverability of equity capital, the coefficient of investment of long-term financial resources, the coefficient of the structure of attracted capital, the coefficient of creditor debt and other liabilities and others.
Financial stability indicates the excess of income over expenses of the enterprise, ensures free maneuvering of funds and, through their effective use, contributes to the uninterrupted process of production and sales of products.
Financial stability is the basis for a stable position of an enterprise in market conditions. It is necessary to take into account that it is subject to the influence of external and internal factors. Internal factors include the industry affiliation of the organization; structure of manufactured products (services), its share in total effective demand; the amount of paid authorized capital; the amount of costs, their dynamics in comparison with cash income; the state of property and financial resources, including stocks and reserves, their composition and structure.
External factors include the influence of economic conditions of business, the degree of development of scientific and technological progress, effective demand and the level of income of consumers, the government's tax credit policy, legislative acts to control the activities of the organization, foreign economic relations, the value system in society, etc. Influence An economic entity is unable to cope with these factors and therefore must adapt to their influence.
This variety of factors also divides resistance itself by type. So, in relation to an enterprise, depending on the factors influencing it, it can be: internal and external, general (price), financial. Internal stability is the general financial condition of an enterprise that ensures consistently high results of its functioning. Its achievement is based on the principle of active response to changes in internal and external factors. The external stability of an enterprise is determined by the stability of the economic environment within which its activities are carried out. It is achieved by an appropriate system of market economy management throughout the country.
The analysis of financial stability is based mainly on relative indicators, since absolute balance sheet indicators in conditions of inflation are very difficult to bring into a comparable form. The relative performance of the analyzed enterprise can be compared with:
- generally accepted “norms” for assessing the degree of risk and predicting the possibility of bankruptcy;
- similar data from other enterprises, which allows us to identify the strengths and weaknesses of the enterprise and its capabilities;
- similar data for previous years to study trends in improvement or deterioration of financial condition.
The overall sustainability of an enterprise is a movement of cash flows that ensures that the receipt of funds (income) always exceeds their expenditure. Financial stability is a reflection of a stable excess of income over expenses, ensures free maneuvering of the enterprise’s funds and, through their effective use, contributes to the uninterrupted process of production and sales of products. Therefore, financial stability is formed in the process of all production and economic activities and is the main component of the sustainability of an enterprise.
To ensure financial stability, an enterprise must have a flexible capital structure and be able to organize its movement in such a way as to ensure a constant excess of income over expenses in order to maintain solvency and create conditions for self-financing. The financial condition of an enterprise, its sustainability and stability depend on the results of its production, commercial and financial activities. If production and financial plans are successfully implemented, then this has a positive effect on the financial position of the enterprise. Consequently, a stable financial condition is not a fluke, but the result of competent, skillful management of the entire complex of factors that determine the results of the enterprise’s economic activities.
Financial stability is the result of the presence of a certain margin of safety that protects the enterprise from risks associated with sudden changes in external factors.
Generalizing characteristics of the financial results of an enterprise are indicators profitability, which characterize the efficiency of the enterprise as a whole, the profitability of production, business, investment activities, cost recovery, etc. They characterize the final results of business more fully than profit, since their value shows the relationship between the effect and the resources used.
The main profitability indicators can be grouped into the following groups:
1) indicators of product profitability, which are calculated on the basis of revenue from the sale of products (performance of work, provision of services) and the costs of its production and sale. These include profitability of sales, profitability of core activities (recoupment of costs);
2) indicators of property profitability - return on assets, profitability of fixed assets and other non-current assets and profitability of current assets;
3) indicators of profitability of capital used, which are calculated on the basis of invested capital and characterize the return on equity and permanent capital.
Along with profitability indicators, the efficiency of the enterprise is characterized by indicators business activity. Business activity is understood as the performance of an enterprise relative to the amount of advanced resources or the amount of their consumption in the production process. Business activity is manifested in the dynamic development of an economic entity, its achievement of its goals, as well as the speed of turnover of funds, on which the size of the annual turnover depends. At the same time, the relative amount of semi-fixed expenses is associated with the size of turnover, and therefore with their turnover, since the faster the turnover, the less these expenses are for each turnover.
In the financial aspect, business activity is manifested primarily in the speed of funds turnover. Analysis of business activity consists of studying the levels and dynamics of various financial ratios - turnover indicators. To analyze business activity, an organization uses two groups of indicators:
- general turnover indicators (turnover ratio; duration of one turnover, release / attraction of working capital).
- activity level indicators (total capital turnover ratio, return on intangible assets, return on assets, return on equity capital).
Acceleration of turnover at one or another stage of the circulation of funds entails acceleration of turnover at other stages. The turnover of funds invested in the property of the enterprise can be assessed using the speed and period of turnover. Thus, the turnover rate is determined by the number of turnovers carried out during the analyzed period by the financial resources of the enterprise advanced for the formation of working capital.
The turnover period is characterized by the average period during which the funds invested in production and commercial operations are returned to the economic activities of the enterprise.
One of the main conditions for the financial well-being of an enterprise is the influx of cash to cover its obligations. The absence of such a minimum required reserve of funds in the company’s account indicates the presence of financial difficulties. An excessive amount of funds leads to the fact that the enterprise suffers losses associated, firstly, with inflation and depreciation of money and, secondly, with the missed opportunity for their profitable placement and receiving additional income. In this regard, there is a need to conduct a cash flow analysis, which allows us to assess the rationality of cash flow management at the enterprise.
The main goal of such an analysis is to identify the causes of the deficit (excess) of funds, determine the sources of their receipt and areas of spending to control the current liquidity and solvency of the enterprise, assess the ability of the enterprise to generate funds in the amount and within the time frame necessary to make planned expenses and payments .
The movement of financial resources in an enterprise is carried out in the form of cash flows. To assess the financial condition of a business entity, not only the amount of cash flow is important, but also the intensity of its movement during the analyzed period of time.
Cash flow analysis allows you to maintain the optimal amount and structure of invested capital in cash in order to obtain the maximum amount of cash flow for a certain period.
Thus, the solvency indicators of an enterprise determine its ability and ability to timely and fully fulfill payment obligations, and liquidity shows how quickly this can be accomplished. Financial stability ensures free maneuvering of funds and, through their effective use, contributes to the uninterrupted process of production and sales of products. Profitability is a general characteristic of the financial results of an enterprise, because allows you to compare invested resources with the final result of the enterprise’s activities. Business activity allows you to make timely decisions regarding the goals of the enterprise and actively interact with partners. Based on optimization of the cash flow of an enterprise, it is possible to identify new sources of incoming cash flows. However, to determine the overall financial stability of an enterprise, it is necessary to use a combination of these indicators. At the same time, the results of a comprehensive analysis of the financial condition allow making decisions to eliminate the negative impact of external and internal factors. It is on the basis of systematic financial and economic analysis that an effective planning and forecasting system is developed, and a rating assessment of the financial condition and investment attractiveness of the enterprise is carried out.
In order to make financial decisions, it is necessary to have a clear classification of income and expenses, profits and losses in order to determine the main source of income and the direction of their use, to be able to objectively analyze the influence of internal and external factors (in particular, taxation) on the efficiency of the enterprise, and to promptly obtain initial information to assess financial stability in a form convenient for the analyst.
Financial activity as an integral part of economic activity should be aimed at ensuring the systematic receipt and expenditure of monetary resources, implementing accounting discipline, achieving rational proportions of equity and borrowed capital and its most efficient use.
The main goal of financial analysis is to promptly identify and eliminate shortcomings in financial activities and find reserves for improving the financial condition of the enterprise and its solvency. In this case, it is necessary to solve the following problems:
- timely and objective diagnosis of the financial condition of the enterprise, identification of its “pain points” and study of the reasons for their formation.
- identifying reserves for improving the financial condition of the enterprise, its solvency and financial stability.
- development of specific recommendations aimed at more efficient use of financial resources and strengthening the financial condition of the enterprise.
- forecasting possible financial results and developing models of financial condition for various options for using resources.
An assessment of financial condition can be performed with varying degrees of detail, depending on the purpose of the analysis, available information, etc. The content and main goal of financial analysis is to assess the financial condition and identify the possibility of increasing the efficiency of the functioning of an economic entity with the help of rational financial policy. The financial condition of an economic entity is a characteristic of its financial competitiveness (i.e., solvency, creditworthiness), the use of financial resources and capital, and the fulfillment of obligations to the state and other economic entities.
In the traditional sense, financial analysis is a method of assessing and forecasting the financial condition of an enterprise based on its financial statements. It is customary to distinguish two types of financial analysis – internal and external. Internal analysis is carried out by enterprise employees (financial managers). External analysis is carried out by analysts who are outsiders to the enterprise (for example, auditors).
Internal analysis is a study of the mechanism of formation, placement and use of capital in order to find reserves for strengthening the financial condition, increasing profitability and increasing the equity capital of a business entity. External analysis is a study of the financial condition of a business entity in order to predict the degree of risk of investing capital and the level of its profitability. Internal analysis is carried out by services for the enterprise, its results are used for planning, control and forecasting of financial condition. Its goal is to ensure a smooth flow of funds and place own and borrowed funds in such a way as to obtain maximum profit and avoid bankruptcy. External analysis is carried out by investors, suppliers of material and financial resources, and regulatory authorities based on published reports. Its goal is to establish the possibility of a profitable investment in order to ensure maximum profits and eliminate losses.
Achieving the goals of analyzing the financial condition of an enterprise is carried out using various methods and techniques. There are various classifications of financial analysis methods. The practice of financial analysis has developed the basic rules for reading (analysis methods) of financial reports. Among them there are 6 main ones:
- Horizontal (time) analysis - comparison of each reporting item with the previous period;
- Vertical (structural) analysis - determining the structure of the final financial indicators and identifying the impact of each reporting item on the result as a whole;
- Trend analysis - comparison of each reporting item with a number of previous periods and determination of the main trend in the dynamics of the indicator, cleared of random external and individual characteristics of individual periods - long-term forecast analysis;
- Analysis of relative indicators (financial ratios) - calculation of numerical ratios of various reporting forms, determination of interrelations of indicators.
- Comparative analysis - divided into: intra-company - comparison of the main indicators of the enterprise and subsidiaries or divisions; inter-farm – comparison of enterprise indicators with those of competitors with the industry average.
- Factor analysis is an analysis of the influence of individual factors (reasons) on the result indicator.
The algorithm of traditional financial analysis includes the following stages:
- Collection of necessary information (the volume depends on the tasks and type of financial analysis). Information processing (compilation of analytical tables and aggregated reporting forms).
- Calculation of indicators of changes in financial statements items.
- Calculation of financial ratios for the main aspects of financial activity or intermediate financial aggregates (financial stability, solvency, profitability).
- Comparative analysis of the values of financial ratios with standards (generally accepted and industry average).
- Analysis of changes in financial ratios (identifying trends of deterioration or improvement).
- Preparation of an opinion on the financial condition of the company based on the interpretation of the processed data.
Analytical calculations are performed either as part of express analysis or in-depth analysis.
The purpose of the express analysis is a clear assessment of the financial well-being and dynamics of development of a commercial organization that is not difficult in terms of time and labor-intensive implementation of algorithms.
In-depth analysis specifies, expands or complements individual express analysis procedures.
System of indicators and coefficients
There are six groups of indicators that describe the property status of a commercial organization, its liquidity, financial stability, business activity, profitability, and position on the securities market.
1. The main characteristics of the property status of a commercial organization are:
- the amount of economic assets at its disposal (most often this is understood as currency, i.e. the balance sheet total, although in market conditions and especially in inflationary conditions this assessment does not coincide at all with the market value of the organization);
- share of non-current assets in the balance sheet currency;
- share of the active part of fixed assets, depreciation rate.
2. The main characteristics of the liquidity and solvency of a commercial organization are:
- the amount of own working capital,
- current, quick and absolute liquidity ratios.
3. The financial stability of a commercial organization is characterized by the following indicators:
- autonomy coefficient shows the share of own funds in the total amount of resources of the enterprise
- financial stability ratio shows what part of current liabilities can be repaid with the company's own capital
- shows the share of equity in the total amount of debt of the enterprise
- ratio of attracted and own funds shows the cost of funds raised by the enterprise per 1 ruble. own
- equity agility ratio shows the degree of mobility of the enterprise's own funds.
4. Key indicators of business activity:
- ratio of growth rates of assets, revenue and profit;
- turnover indicators;
- capital productivity;
- labor productivity;
- duration of the operating and financial cycle.
5. The profitability of the financial and economic activities of a commercial organization is characterized by the following indicators:
- profit;
- product profitability;
- return on capital advanced;
- profitability of own capital.
6. Indicators of the situation on the securities market:
- market value of a commercial organization;
- earnings per share;
- total return on stocks (bonds);
- capitalized return on stocks (bonds).
The vast majority of ratios are calculated based on the balance sheet and income statement; Moreover, the calculation can be performed either directly according to reporting data, or using a consolidated balance sheet. Convolution (compaction) of the balance sheet is carried out by combining similar items into groups. Thus, the number of balance sheet items can be sharply reduced and its visibility increased. This technique is especially useful and necessary for comparative analysis of the balance sheets of domestic and foreign commercial organizations. In economically developed countries there is no strict regulation of the balance sheet structure. Therefore, one of the first steps of comparative analysis is to bring balance sheets to a structure comparable in composition of items. Convolution can also be used when preparing a balance sheet for calculating analytical coefficients; By aggregating items in this case, greater clarity is achieved for reading the balance and calculation algorithms are simplified.
Using absolute and relative indicators in accounting and analytical work, several types of analysis can be carried out.
- Comprehensive assessment of financial condition
- Evaluation of a separate group of accounting objects or a separate aspect of the organization’s activities
- Assessing Inventory Financing Practices. The relationship between stocks of raw materials, materials, finished products and coating sources is assessed. This piece of analysis is especially important for commercial organizations, in whose balance sheets inventories occupy a significant share. The point of such an analysis is to check which sources of funds and in what volume are used to cover production (commodity) inventories.
- Assessing the degree of satisfaction of the balance sheet structure. According to Resolution No. 498, the indicators for assessing the satisfaction of the balance sheet structure are: current liquidity ratio (CLR); coefficient of provision with own working capital (Kos) and coefficient of restoration (loss) of solvency (Kuv).
- Assessment of the borrower's creditworthiness.The basis of formalized methods for assessing the creditworthiness of potential borrowers is the calculation of a number of ratios, for example, current liquidity and profitability, and their comparison with certain threshold values established by the lender in the form of a special scale. Depending on which class the borrower falls into, he may receive a loan under certain conditions.
- Bank reliability ratings. The rating assessments are based on various indicators, the calculation algorithms of which are similar to the algorithms for calculating the coefficients discussed above that characterize the financial condition of the object of analysis, and are built taking into account the specifics of the bank’s activities and its reporting. These indicators necessarily include liquidity ratios. Based on these indicators, as a rule, a certain summary criterion is constructed that gives a generalized assessment of the bank’s reliability.
Sources of information for financial analysis
The source of information for financial analysis is standard forms of financial statements:
- Balance (form No. 1)
- Report on financial results and their use (form No. 2).
Additional data is needed to conduct an in-depth analysis. There are four main positions on which additional information is required.
1. The share of fixed costs in the cost (in the costs of products sold). The most significant information for analysis is provided by dividing costs (reflected in form No. 2) into variable and constant components. It is convenient to describe the cost structure by specifying the share of fixed costs in the cost of products sold.
The separation of fixed and variable costs allows you to conduct a break-even analysis, assess the dynamics of changes in prices for products sold and materials consumed in the production process (calculate the price coefficient), and determine the causes of losses from core activities (increase in variable or fixed costs).
Of the general list of additional data, information on the cost structure is of greatest importance.
Form 5-z “Information on the costs of production and sales of products (works, services)” can be a source of information about the share of fixed costs in the cost price. However, information in this form may require additional processing, for example, dividing the costs of materials, fuel, energy into variable and constant components; separating the share of costs for sold products from the total cost of the period.
One of the options for determining the amount of fixed costs for a period is to use information from statements (estimates) of overhead costs for the period for individual workshops and production facilities of the enterprise.
Often, enterprises have similar reporting forms - statements of general economic, general shop expenses and expenses for the maintenance and operation of equipment, which are prepared by each of the workshops (productions, services) of the organization.
Based on the statements for each workshop (service, production), fixed costs are allocated, written off to the cost of production for a given period. By summing them up, you can estimate the total amount of fixed costs of the enterprise included in the cost of production in a given period. Knowing what share of the products produced was sold, it is possible to determine the amount of fixed costs included in the cost of products sold.
If statements of general shop, general plant expenses, etc. contain cost elements that are essentially variable, additional processing of these documents is required. For example, statements of general shop expenses may contain the wages of auxiliary workers, determined on a piece-rate basis.
In this case, the wages of auxiliary workers are a variable value, and it must be attributed to the variable costs of the period.
2. The total amount of depreciation of fixed assets and intangible assets. To assess the condition of property and construct a cash flow statement, it is necessary to know the total amount of depreciation of fixed assets and intangible assets accrued for each analyzed reporting date.
The source of information on the amount of depreciation charges for fixed assets and intangible assets as of a certain reporting date can be the certificate to Section 3 “Depreciable Property” (Appendix 5 to the Balance Sheet).
3. The amount of interest accrued during the period for attracted sources of financing. To analyze financial leverage and construct an indirect cash flow statement, information is required on the amount of interest for attracted sources of financing accrued in each analysis interval. It is advisable to separate out from the total amount interest that reduces the taxable base when calculating income tax, and interest that does not reduce taxable profit.
In accordance with the Tax Code, interest on borrowed funds reduces taxable profit in the following amount (Articles 265, 269, 270):
1. In full, if the amount of accrued interest does not deviate significantly (deviates by no more than 20%) from the average level of interest charged on debt obligations issued in the same reporting period on comparable terms.
2. In the amount of [CBRF Refinancing Rate*1.1] for ruble loans or 15% for loans in foreign currency in the absence of debt obligations issued in the same quarter on comparable terms.
4. Average number of employees. Payroll Fund. To analyze labor efficiency, data is required on the average number of employees and the amount of wages accrued in each of the periods under consideration.
Information on the number and wages of employees can be obtained, for example, using Appendix to Balance No. 4-FSS of the Russian Federation “Payroll for the Social Insurance Fund of the Russian Federation”, form No. P-4 “Information on the number, wages and movement of workers” .
It is advisable to display the additional data listed above in a separate tabular form.
The list of additional data may expand depending on the task posed during the analysis.
Length of analysis period is determined by the frequency of preparation of reporting data and can vary from month to year. When using automated accounting programs, the frequency of information preparation and, therefore, the duration of the analysis period can be several days.
One of the tasks of financial analysis is to identify the dynamics (trends and patterns) of changes in the state of the enterprise in the period under study. In this regard, it is recommended to select a review horizon of at least a year with a quarterly (monthly) breakdown.
The reliability of the results of financial analysis and, consequently, the correctness of management decisions made depend on the degree of reliability of the source data.
Methodology for analyzing financial condition
Analytical procedures for analyzing financial condition are carried out according to a two-model system:
- express analysis of financial and economic activities;
- in-depth financial analysis.
The detail of the procedural system of financial analysis depends on its goals and objectives, as well as on various factors (information, methodological, time, personnel and technical support).
The purpose of an express analysis of the financial and economic activities of an enterprise is to obtain prompt, visual and reliable information about its financial well-being.
- preliminary (organizational) stage;
- preliminary review of financial statements;
- economic reading and reporting analysis.
The purpose of the first stage is to decide on the feasibility of analyzing financial statements and their readiness for reading. The first problem is solved with the help of an audit report. There are two types of such conclusions - standard and non-standard.
A standard conclusion is a unified and briefly stated document containing a positive assessment of the auditor on the reliability of the information presented in the reporting about the property and financial position of the enterprise. If there is such a conclusion, an external analyst can rely on the opinion of the auditor and not perform additional analytical procedures in order to determine the financial condition of the company.
The non-standard audit report is more voluminous and contains additional information of interest to users of the statements. It may contain an unconditional positive assessment of the enterprise’s work or such an assessment, but with reservations.
For example, when auditing the statements of independent participants of a financial and industrial group by different auditing firms.
Checking the readiness of reporting for use is of a technical nature, since its visual and counting verification is carried out according to formal criteria.
The purpose of the second stage is to familiarize yourself with the annual report and the explanatory note to it. This is necessary to assess the operating conditions of the enterprise in the reporting period and identify the main trends in its performance indicators (profitability, asset and equity turnover, balance sheet liquidity, etc.).
When analyzing financial indicators, you should take into account some distorting factors, in particular inflation. The balance sheet as the main analytical document is not free from limitations. For example, it reflects the constancy in the funds and liabilities of the enterprise at a certain date (at the end of the month, quarter), but does not answer the question of why this situation arose. The balance sheet is a summary of instant data at the end of the reporting period, therefore it does not reflect the sources of the enterprise’s funds and their use within the reporting period.
The third stage is the main one in express analysis. Its goal is a generalized description of the financial and economic activities of a commercial organization. It is carried out with varying degrees of detail in the interests of information users. In general, at this stage, the sources of the enterprise’s funds, their placement and efficiency of use are studied. The point of express analysis is to select a minimum number of indicators and constantly monitor their dynamics.
One of the options for selecting analytical indicators is presented in the table.
Table. System of analytical indicators for express analysis
Direction (procedure) of financial analysis |
Indicators |
1. Assessment of the economic potential of the enterprise |
|
1.1. Assessment of property status |
1. The amount of fixed assets and their share in assets. |
1.2. Financial position assessment |
1. The amount of equity capital and its share in sources of funds. |
1.3. Presence of unfavorable items in the financial statements |
1. Losses. |
2. Assessment of the effectiveness of financial and economic activities |
|
2.1. Profitability assessment |
1. Accounting profit. |
2.2. Assessing the dynamism of enterprise development |
1. Comparative growth rates of sales, assets and profits. |
2.3. Assessing the effectiveness of economic potential |
1. Return on advanced (total) capital. |
The express analysis ends with a conclusion about the advisability of a further in-depth analysis of the financial and economic activities of the enterprise.
The purpose of an in-depth (detailed) analysis is a detailed description of the property and financial position of the enterprise, an assessment of its current financial results and a forecast for the future period. It complements and expands rapid analysis procedures. The degree of detail depends on the qualifications and desire of the analyst.
In general, the program for an in-depth analysis of the financial and economic activities of an enterprise looks like this (as one of the possible options).
- Stage 1: analysis of the dynamics and structure of the balance sheet
- Stage 2: analysis of the financial stability of the organization.
- Stage 3: analysis of balance sheet liquidity and solvency of the enterprise
- Stage 4: analysis of the state of assets
- Stage 5: business activity analysis
- Stage 6: diagnostics of the financial condition of the enterprise
Analysis of balance dynamics and structure
In the process of assessing the property status of an organization, the composition, structure and dynamics of its assets are studied according to balance sheet data. The balance sheet allows you to give a general assessment of the changes in all the property of the enterprise, to identify current (mobile) and non-current (immobilized) funds in its composition, and to study the dynamics of the property structure. Structure refers to the percentage of individual property groups within these groups.
Analysis of the dynamics of the composition and structure of property makes it possible to determine the size of the absolute and relative increase or decrease in the entire property of the enterprise and its individual types. An increase (decrease) in an asset indicates an expansion (constriction) of the enterprise’s activities.
Identification of “sick” balance sheet items
Balance sheet analysis can be carried out directly from the balance sheet or from the aggregated analytical balance sheet presented below. The items (lines) of the balance sheet that are recommended to be included in the selected groups of the analytical balance sheet are indicated in brackets.
Table. Aggregated analytical balance
Symbol |
For the beginning of the year |
At the end of the year |
|
1. Cash and short-term financial investments (page 250 + page 260) |
|||
2. Accounts receivable and other current assets (line 215 + line 240 + line 270) |
|||
3. Inventories and costs (p. 210 - p. 215 + p. 220) |
|||
Total current assets (current assets) (line 290 - line 230) |
|||
4. Immobilized funds (non-current assets) (p. 190 + p. 230) |
|||
Total assets (property) (p. 300) |
|||
1. Accounts payable and other short-term liabilities (line 620 + line 630 + line 650 + line 660) |
|||
2. Short-term loans and borrowings (p. 610) |
|||
Total short-term borrowed capital (short-term liabilities) (line 690 - line 640) |
|||
3. Long-term borrowed capital (long-term liabilities) (p. 590) |
|||
4. Own capital (p. 490 + p. 640) |
|||
Total liabilities (capital) (p. 700) |
In the analytical balance, the general balance model is preserved: SVA = SVK or DS + DZ + ZZ + VA = KZ + KK + DO + SK.
During the preliminary assessment of financial statements, we identify and evaluate the dynamics of “sick” reporting items of two types:
- Evidence of the extremely unsatisfactory performance of a commercial organization in the reporting period and the resulting poor financial position (uncovered losses, overdue loans and accounts payable, etc.);
- Evidence of certain shortcomings in the organization's work, which, if regularly repeated in the reporting of several adjacent periods, can significantly affect the financial position of the organization (overdue accounts receivable, debt written off to financial results, fines, penalties, penalties collected from the organization, negative net cash flow, etc.).
The first group includes:
“Uncovered losses of previous years” (form No. 1), “Uncovered loss of the reporting year” (form No. 1), “Credits and loans not repaid on time” (form No. 5), “Overdue accounts payable” (form . No. 5), “Bills issued overdue” (form No. 5). These articles show the extremely unsatisfactory performance of a commercial organization in the reporting period and the resulting poor financial position. The reasons for the formation of a negative difference between income and expenses for the enlarged nomenclature of items can be traced in form No. 2 (result from sales, result from other sales, result from non-sales operations). The reasons for unprofitable work are analyzed in more detail during internal analysis based on accounting data. Thus, an element of the article “Settlements with creditors for goods and services” is debt to suppliers for settlement documents not paid on time. The presence of such overdue debt indicates serious financial difficulties for a commercial organization.
The second group usually includes the data given in the second section of Form No. 5: “Overdue accounts receivable”, “Overdue bills received” and “Receivables written off to financial results”. The significance of the amounts for these items in relation to the financial stability of the enterprise depends on their share in the balance sheet currency and indicates the presence of problems with clients.
Shortcomings in work are reflected in a hidden, veiled form in a number of balance sheet items, which can be identified as part of internal analysis using current accounting data. This is not caused by data falsification, but by the existing balance sheet methodology, according to which many balance sheet items are complex. In particular, this applies to the articles:
- “Settlements with debtors for goods, works and services”, which may include unjustified receivables in the form of:
- goods shipped and work delivered according to payment documents that were not submitted to the bank for collection, for which the deadlines established for the submission of documents to secure loans have expired (accounts 62 and 45)
- shipped goods and submitted work according to payment documents, not paid on time by buyers and customers (invoices 62 and 45)
- goods held in custody by buyers due to refusal to accept (accounts 62 and 45)
- settlements for goods sold on credit and not paid on time (invoices 62)
- settlements for goods sold on credit, not paid on time and executed with notary signatures (invoices 62)
- bills for which funds were not received on time (accounts 62)
- “Settlements with personnel for other operations”, which may reflect unjustified receivables in the form of settlements with financially responsible persons for shortages, damage and theft (subaccount 73-3)
- “Other assets”, which may include shortages from damage to inventory items not written off from the balance sheet in the prescribed manner (account 84)
- “Settlements with creditors for goods and services,” which may include unjustified accounts payable in the form of:
- settlements with suppliers for settlement documents not paid on time (account 60)
- settlements with suppliers for uninvoiced supplies (account 60)
- settlements with suppliers on overdue bills of exchange (account 60)
The indicated amounts are not explicitly identified in the balance sheet, but they can easily be identified as part of internal analysis using analytical transcripts for accounts 45,60,62,73,84. The reasons for these amounts may vary. However, if their growth is observed in dynamics, this indicates serious shortcomings in the organization of accounting and internal control at the enterprise.
Certain shortcomings in financial and economic activities are indicated by the excess of the amount under the item “Settlements with employees for loans received by them” over the amount of “Loans for workers and employees” (the corresponding breakdowns can be obtained as part of the internal analysis). This indicates that the enterprise did not withhold regular payments to repay the debt from employees, but nevertheless deposited the corresponding amount into the bank to repay the loans, i.e. there is unplanned use of funds.
During the analysis, it is advisable to determine the growth rate of the most significant items (groups) of the balance sheet and compare the results obtained with the growth rate of sales revenue. An important area of analysis is vertical analysis of the balance sheet, during which the share and structural dynamics of individual groups and items of assets and liabilities of the balance sheet are assessed.
A “good” balance satisfies the following conditions:
- the balance sheet currency at the end of the reporting period increases compared to the beginning of the period, and its growth rate is higher than the inflation rate, but not higher than the revenue growth rate;
- other things being equal, the growth rate of current assets is higher than the growth rate of non-current assets and short-term liabilities;
- the size and growth rate of long-term sources of financing (equity and long-term debt capital) exceed the corresponding indicators for non-current assets;
- the share of equity in the balance sheet currency is not lower than 50%;
- the size, share and growth rate of receivables and payables are approximately the same;
- There are no uncovered losses on the balance sheet.
When analyzing the balance sheet, changes in accounting methodology and tax legislation, as well as the provisions of the organization’s accounting policies, should be taken into account.
Relative balance sheet indicators make it possible to carry out horizontal and vertical analysis. Horizontal analysis involves studying the absolute indicators of an organization’s reporting items for a certain period, calculating the rate of their change and evaluating it. But in conditions of inflation, the value of horizontal analysis is somewhat reduced, since the calculations made with its help do not reflect objective changes in indicators associated with inflation processes. Horizontal analysis is complemented by vertical analysis of the study of financial indicators.
Vertical analysis refers to the presentation of reporting data in the form of relative indicators through the share of each article in the overall reporting and assessment of their changes over time. Relative indicators smooth out the impact of inflation, which allows for a fairly objective assessment of the changes taking place.
Analysis of the financial stability of the enterprise
The essence of assessing financial stability is the assessment of the provision of reserves and costs with sources of formation. The degree of financial stability is the reason for a certain degree of solvency of the organization. The most general indicator of financial stability is the surplus or shortage of sources of reserves and costs.
Absolute indicators of financial stability are indicators characterizing the state of reserves and the availability of their sources of formation:
- Own working capital (own working capital): SOS = SK – VA
- Net working capital: NSC = SK + DO - VA or NSC = OA - KO
- Net assets: NAV (the calculation procedure is established by a letter from the Ministry of Finance of Russia and the Federal Securities Commission. The analytical balance presented above is formed so that NC = NAV)
Relative indicators of financial stability characterize the degree of protection of the interests of investors and creditors. The basis for their calculation is the cost of funds or sources of operation of the enterprise. The owners of the enterprise are interested in optimizing their own capital and minimizing borrowed funds in the total volume of financial sources. Lenders evaluate a borrower's financial strength based on net worth and the likelihood of bankruptcy averted.
The financial stability of an enterprise is characterized by the state of its own and borrowed funds and is assessed using a system of financial ratios.
Table. Characteristics of financial stability indicators
Indicator name |
Calculation method and symbol |
Characteristic |
||
Financial Independence Ratio |
Ph.D. = SC/WB |
Share of equity in the balance sheet currency. The recommended value of the indicator is above 0.5; |
||
Financial stress ratio |
Kf.eg. = ZK/VB |
The share of borrowed funds in the borrower's balance sheet currency. Recommended value no more than 0.5 |
||
Debt ratio |
Kz = ZK/SK |
The ratio between borrowed and equity funds. Recommended value is not higher than 0.67 |
||
Provision ratio of own working capital |
Ko = COC/OA |
The share of COC in the total value of the company's current assets. Recommended value? 0.1. |
||
SOS maneuverability coefficient |
Km = SOC/SC |
Share of COC in the total cost of equity capital. Recommended value 0.2–0.5 |
||
Real property value coefficient |
Creal st-ti = (BOA+Z)/WB |
Shows the share of means of production in the value of property, the provision of means of production. |
||
Inventory coverage ratio with own funds |
Kipn= SOC/W |
Characterizes the extent to which inventories are covered with own funds (they need to attract borrowed funds). Value: 0.6–0.8 |
||
Analysis of balance sheet liquidity and solvency of the enterprise
Solvency characterizes the ability and ability of an enterprise to timely and fully fulfill its financial obligations to internal and external partners, as well as to the state. Solvency directly affects the forms and conditions of commercial transactions, including the possibility of obtaining loans and borrowings.
Liquidity determines the ability of an enterprise to quickly and with a minimum level of financial losses convert its assets (property) into cash. It is also characterized by the presence of liquid funds in the company in the form of cash balances in the cash register, in bank accounts and easily realizable elements of current assets (for example, short-term securities).
A study of the problem of the solvency of organizations shows that the debt of business entities is a common phenomenon that accompanies market transformations. In this regard, the issue of solvency analysis, the main goal of which is to identify the causes of loss of solvency and find ways to restore it, becomes particularly relevant. When assessing the solvency and liquidity of an enterprise, its ability to pay all its obligations (solvency) and its ability to pay off short-term obligations and meet unexpected expenses (liquidity) are analyzed.
The need to analyze balance sheet liquidity arises in market conditions due to increasing financial restrictions and the need to assess the creditworthiness of an enterprise. The liquidity of an enterprise is defined as the degree to which the enterprise's liabilities are covered by its assets, the period of transformation of which into monetary form corresponds to the period of repayment of obligations. The less time it takes for a given type of asset to acquire monetary form, the higher its liquidity. Analysis of balance sheet liquidity consists of comparing funds for an asset, grouped by the degree of their liquidity and arranged in descending order of liquidity, with liabilities for a liability, grouped by their maturity dates and arranged in order of increasing maturity.
Balance sheet liquidity means the presence of working capital in an amount potentially sufficient to pay off short-term obligations. Balance sheet liquidity is the basis of the organization's solvency. Balance sheet liquidity can be assessed using various methods, including based on the calculation of basic liquidity ratios.
The absolute liquidity ratio (Kal) shows what part of the short-term debt the company will be able to repay in the near future.
The critical (urgent) liquidity ratio (intermediate coverage ratio) (Ccl) characterizes the expected solvency of the enterprise for a period equal to the average duration of one turnover of receivables.
The current liquidity ratio (CLR) shows the sufficiency of the company's working capital to cover its short-term obligations.
The calculation of each of the coefficients includes certain groups of current assets that differ in the degree of liquidity (i.e., the ability to be transformed into cash during the production and commercial cycle).
Various liquidity indicators not only provide a versatile characteristic of the stability of the financial condition, but also meet the interests of various external users of analytical information. For example, a company's suppliers are interested in whether the company will be able to pay them back in the near future, so they will pay attention, first of all, to the absolute liquidity ratio. And the bank lending to the enterprise or lenders will be more interested in the value of the critical liquidity ratio. The owners of an enterprise - shareholders - most often assess the financial stability of the enterprise in the long term, and therefore the current liquidity ratio is more important to them.
It should be noted that the level of liquidity ratios is not yet a sign of good or poor solvency, and therefore it is advisable to supplement the analysis with the calculation of financial stability indicators; its assessment shows the presence or absence of a “margin of safety” at the enterprise and the possibility of attracting additional borrowed funds. Assessing financial stability is associated with studying the composition, structure and dynamics of liabilities (sources of financing) of an organization. Particular attention is paid to the ratio of liabilities and equity capital of the enterprise, their rates and growth, which makes it possible to judge the inclination or aversion of the enterprise management to risk when making financial decisions. The task of financial stability is to assess the degree of independence of the organization from borrowed sources of financing and the optimal structure of the organization's assets and liabilities.
Asset condition analysis
As part of the analysis of the balance sheet, it is necessary to analyze the composition, structure and efficiency of use of non-current and current assets. To assess the effectiveness of current assets, profitability and turnover indicators are used.
To assess working capital turnover in general, the following indicators can be recommended:
Working capital turnover ratio: Kb = N / ОАср, where N is sales revenue; ОАср is the average value of current assets.
Period of turnover of working capital: Po = ОАср * D / N, where D is the number of days in the analyzed period.
An analysis of the dynamics, composition and structure of non-current assets on the balance sheet should be complemented by an analysis of fixed assets.
Business activity analysis
After considering the methodology for calculating liquidity and financial stability indicators, it is necessary to calculate the coefficients of business activity and profitability to assess the efficiency of the financial activities of the enterprise.
Indicators of business activity are divided into qualitative (current and future) and quantitative (absolute and relative).
Current indicators characterize business activity on a specific research date. With high values of these indicators, the organization, as a rule, has a fairly high solvency, creditworthiness, financial stability and investment attractiveness. As for long-term quality indicators, they reflect such actions and operations of the organization that will ensure high rates of business activity in the future (purchase of new high-tech equipment, attraction of highly qualified personnel, active marketing research, etc.). Practice shows that relative indicators are of greatest importance in the process of analyzing business activity. They have a number of advantages over absolute ones. Based on them, it is possible to carry out spatial comparisons between enterprises of different directions and sizes of activity. In addition, the coefficients obtained based on the ratio of cost indicators exclude the influence of inflation. Relative indicators of business activity characterize the efficiency of using resources (enterprise property). The basis of well-known methods for analyzing the business activity of an enterprise is the assessment of the turnover of assets and liabilities of the company. As a result, it is possible to analyze the speed of their circulation within the circulation of capital. The higher this speed, the more business activity the organization demonstrates. By combining the turnover period of certain types of current assets and short-term liabilities, it is possible to calculate the duration of the operating and financial cycles, the reduction of which indicates an increase in the business activity of the enterprise.
The main indicators for assessing business activity are:
- Asset turnover ratio;
- Duration of one asset turnover in days;
- Non-current assets turnover ratio
- Duration of one turnover of non-current assets in days
- Current assets turnover ratio
- Duration of one turnover of current assets in days
- Accounts receivable turnover ratio
- Duration of one receivables turnover in days
- Equity turnover ratio
- Duration of one turnover of equity capital in days
- Accounts payable turnover ratio
- Duration of one turnover of accounts payable in days
The effectiveness and economic feasibility of the operation of the enterprise is assessed using a system of profitability indicators. In the broadest sense of the word, profitability means profitability, profitability. An enterprise is considered profitable if the income from the sale of products (works, services) covers the costs of production (circulation) and, in addition, forms an amount of profit sufficient for the normal functioning of the enterprise.
The economic essence of profitability can be revealed only through the characteristics of the system of indicators. Their general meaning is to determine the amount of profit from one ruble of invested capital.
An assessment of the profitability of an enterprise is carried out to assess cost effectiveness and forecast financial results in connection with changing business circumstances. Based on the level of profitability, one can assess the long-term well-being of the enterprise, i.e. the ability of a business to earn a sufficient return on investment. For long-term creditors of investors who invest money in the equity capital of an enterprise, this indicator is a more reliable indicator than indicators of financial stability and liquidity, determined on the basis of the ratio of individual balance sheet items.
Thus, we can conclude that profitability indicators characterize the financial results and efficiency of the enterprise. They measure the profitability of an enterprise from various positions and are systematized in accordance with the interests of participants in the economic process.
Profitability ratios characterize the profitability of a company's activities and are calculated as the ratio of the profit received to the funds spent or the volume of products sold. A distinction is made between the profitability of total capital, non-current and current assets, equity, sales, and products sold. Let's reflect the profitability indicators in the table.
Table. Profitability indicators
Indicator name |
Calculation method |
Characteristic |
Return on total capital (ROC) |
Rsk = PE/SK x 100% |
Shows the amount of net profit per ruble of equity capital |
Efficiency ratio of using own funds. |
Ra = PE/A x 100% |
|
Return on equity reflects how much profit is received from each ruble invested by the owners of the enterprise. |
||
Return on non-current assets (ROA) |
Pvoa = BP/BOA x 100% |
Characterizes the amount of accounting profit attributable to each ruble of non-current assets |
Return on current assets (ROA) |
Roa = BP/OAx100% |
Shows the amount of accounting profit per one ruble of current assets. |
Return on sales (Rsales) |
Sales= |
Characterizes how much accounting profit falls on a ruble of sales volume |
Return on products sold (Ррр) |
Rpr = Prp/Srp x 100% |
Shows how much profit from product sales accounts for one ruble of total costs. |
In the process of analysis, it is necessary to study the dynamics of the listed profitability indicators, the implementation of the plan at their level and conduct inter-farm comparisons with competing enterprises.
Diagnostics of the financial condition of the enterprise
Diagnosis of the financial condition of an enterprise is carried out to establish the insolvency of the enterprise, as well as in order to develop the right decisions to get the enterprise out of a crisis state.
When assessing the financial condition of insolvent enterprises, a situation often arises when some estimated indicators exceed the standard value, while others, on the contrary, reach a critical point. For example, one of the analyzed enterprises forms its assets 93% from its own funds, while having a current liquidity ratio of 1.2, and another with a current liquidity ratio of 1.8 - 82% from borrowed sources.
Taking into account the variety of financial processes, which is not always reflected in solvency ratios, the difference in the level of their normative assessments and the resulting difficulties in the overall assessment of the solvency of the enterprise, many foreign and domestic analysts recommend performing an integral or comprehensive diagnosis of the financial condition of the enterprise.
The most common approaches to diagnosing financial condition are: assessing the possibility of restoration (loss) of solvency and the use of discriminant mathematical models of the probability of bankruptcy (Altman model, etc.).
Extensive practical experience in assessing the financial condition of an enterprise and making forecasts for the future has been accumulated in economically developed countries. One of the main principles of accounting in these countries is the principle of “temporary unlimited functioning of the enterprise” (going concern concept). This means that the enterprise has neither the intention nor the forced need to cease its activities in the foreseeable future or significantly reduce its scale. It is this principle that makes it possible to use in reporting the valuation of assets not at liquidation value, but at cost. Due to the exceptional importance of this principle, Western experts have developed a system of indicators of signs of bankruptcy, used by both independent and external auditors. In particular, in the UK, the Committee for the Generalization of Auditing Practices has developed guidelines containing a list of critical indicators for assessing the possible bankruptcy of an enterprise. These indicators are divided into two groups.
The first group includes criteria and indicators whose unfavorable current values or emerging trends indicate possible significant financial difficulties in the foreseeable future, including possible bankruptcy. These include:
- recurring significant losses in core production activities;
- exceeding a certain critical level of overdue accounts payable;
- excessive use of short-term borrowed funds as sources of financing long-term investments;
- low liquidity ratios;
- lack of working capital (functioning capital);
- the share of borrowed funds in the total amount of sources of funds increasing to dangerous limits;
- incorrect reinvestment policy;
- excess of borrowed funds over established limits;
- failure to fulfill obligations to creditors and shareholders (regarding timely repayment of loans, payment of interest and dividends);
- presence of overdue accounts receivable;
- the presence of excess production inventories and stale goods;
- deterioration of relations with banking system institutions;
- use of new sources of financial resources on relatively unfavorable terms;
- use of over-depreciated equipment in the production process;
- potential loss of long-term contracts;
- unfavorable changes in the order portfolio.
The second group includes criteria and indicators, the unfavorable values of which do not give reason to consider the current financial condition as critical. At the same time, they indicate that under certain conditions or failure to take effective measures, the situation can deteriorate sharply. These include:
- loss of key management personnel;
- forced stops, as well as disruptions to the rhythm of the production and technological process;
- excessive dependence of the enterprise on any one specific project, type of equipment, type of asset;
- excessive reliance on the success and profitability of a new project;
- participation of the enterprise in legal proceedings with an unpredictable outcome;
- loss of key counterparties;
- underestimation of the need for constant technical and technological renewal of the enterprise;
- ineffective long-term agreements;
- political risk.
Not all described criteria and indicators can be calculated directly from financial statements. At the same time, if, as part of a preliminary analysis of the financial condition of an enterprise, it is possible to use additional information on some of the indicators listed above, then the reliability of the analysis and the validity of the conclusions will only increase.
For the convenience of analyzing the solvency of an enterprise, a compacted analytical net balance sheet is used, formed by aggregating elements of balance sheet items that are homogeneous in composition in the necessary analytical sections: real estate, current assets, etc.
In accordance with the current legislation on bankruptcy of enterprises, a limited range of indicators is used to diagnose their insolvency:
- current ratio
- indicator of provision of own working capital
- coefficient of recovery (loss) of solvency
The basis for declaring the balance sheet structure unsatisfactory and the enterprise insolvent is the presence of one of the conditions:
- The current liquidity ratio (KTL) at the end of the reporting period is below the standard value (2.00)
- the coefficient of provision with own working capital at the end of the reporting period is below the standard value (0.1)
The coefficient of provision with own working capital (Koss) is determined as follows:
Koss = (current assets - current liabilities) / current assets
If the current liquidity ratio is below the standard, and the share of own working capital in the formation of assets is less than the standard, but there is a tendency for these indicators to grow, then the solvency recovery ratio (CRR) for a period of six months is determined:
Kvp = (Ktl1 + 6/T(Ktl1-Ktl0))/Ktln, where
K tl1 – liquidity ratio at the beginning of the period
K tl0 – liquidity ratio at the end of the period
Ktln – standard liquidity ratio
T – reporting period, months.
6 – period of restoration of solvency.
If Kvp>1, then the enterprise has a real opportunity to restore its solvency, and vice versa, if Kvp
If the actual level of Ktl and Koss is equal to or higher than the standard values at the end of the period, but there is a downward trend, the coefficient of loss of solvency (Kup) is calculated for a period of three months:
Kup = K tl1 + 3/T(K tl1 – K tl0))/Ktln
If KP>1, then the company has a real opportunity to maintain its solvency for three months, and vice versa.
Conclusions regarding the recognition of the balance sheet structure as unsatisfactory and the enterprise as insolvent are made when the balance sheet structure is negative and there is no real opportunity for it to restore its solvency.
Taking into account the variety of indicators of financial stability, the difference in the level of their critical assessments and the difficulties arising in connection with this in assessing the risk of bankruptcy of an enterprise, many domestic and foreign economists recommend making an integral score assessment of financial stability.
Integral score of financial stability
The credit scoring technique was first proposed by the American economist D. Durand in the early 40s. The essence of this methodology is the classification of enterprises by risk level based on the actual level of financial stability indicators and the rating of each indicator, expressed in points based on expert assessments. A simple scoring model is presented in the table below:
Grouping of enterprises into classes according to level of solvency:
Index |
Class boundaries according to criteria |
||||
1 class |
2nd grade |
3rd grade |
4th grade |
5th grade |
|
Return on total capital, % |
30 and above (50 points) |
29.9-20 (49.9-35 points) |
19.9-10 (34.9-20 points) |
9.9-1 (19.9-5 points) |
less than 1 (0 points) |
Current ratio |
2 and above (30 points) |
1.99-1.7 (29.9-20 points) |
1.69-1.4 (19.9-10 points) |
1.39-1.1 (9.9-1 points) |
less than 1 (0 points) |
Financial Independence Ratio |
0.7 and above (20 points) |
0.69-0.45 (19.9-10 points) |
0.44-0.30 (9.9-5 points) |
0.29-0.20 (5-1 points) |
less than 0.2 (0 points) |
Class boundaries |
100 points and above |
99-65 points |
64-35 points |
34-6 points |
|
Having determined the values of the coefficients, you can determine the amount of points on the basis of which the boundaries of the financial stability classes are determined:
1 class– enterprises with a good margin of financial stability, allowing them to be confident in the repayment of borrowed funds;
2nd grade– enterprises that demonstrate some degree of debt risk, but are not yet considered risky;
3rd grade– problematic organizations;
4th grade– enterprises with a high risk of bankruptcy even after taking measures for financial recovery. Lenders risk losing their funds and interest;
5th grade– companies of the highest risk, practically insolvent.
Problems in the financial condition of the organization and their causes
For more information you can also contact us by email becmology at gmail.com.
Indicators characterizing the financial condition can be divided into groups that reflect various aspects of the financial condition of the enterprise. These include liquidity ratios; capital structure indicators (sustainability ratios); profitability ratios; business activity ratios.
The degree of solvency of an enterprise is usually assessed using financial liquidity ratios:
1 Absolute liquidity ratio calculated as the ratio of cash and marketable short-term securities to current short-term debt:
where DS is cash;
KV – short-term investments;
KO – short-term liabilities (all short-term liabilities minus deferred income and consumption funds).
In world practice, an absolute liquidity ratio of 0.2–0.3 is considered sufficient, that is, an enterprise can immediately repay 20–30% of current liabilities.
2 Liquidity ratio is defined as the ratio of cash, short-term financial investments and accounts receivable to current liabilities:
(87)
where ОА – current assets;
Z – reserves.
According to estimates accepted in international practice, the value of the coefficient should be 0.8 – 1.
3 Overall coverage ratio, often referred to simply as the coverage ratio, it provides an overall assessment of a business's solvency. The coverage ratio is of interest to buyers and holders of shares and bonds of a company. It is calculated using the formula:
(88)
The normal value of this coefficient is 2.0 – 2.5.
Financial stability and autonomy is reflected by the structure of the balance sheet (the relationship between individual sections of assets and liabilities), which is characterized by several indicators.
1 Autonomy coefficient characterizes the enterprise's dependence on external loans. The lower the ratio, the more loans the company has, the higher the risk of insolvency. A low value of the ratio also reflects the potential danger of a cash shortage for the enterprise:
(89)
It is considered normal if the value of the autonomy coefficient is greater than 0.5, that is, the financing of the enterprise’s activities is carried out at least 50% from its own sources.
2 The share of borrowed funds is determined by the formula:
(90)
This ratio shows how much borrowed funds the company attracted per 1 ruble. own funds invested in assets.
3 Investment ratio– the ratio of borrowed and equity funds is another form of representing the financial independence ratio:
(91)
Profitability ratios. In addition to the profitability ratios already discussed, when analyzing the financial condition, other modifications are calculated that characterize various aspects of the enterprise’s activities:
1 Return on sales ratio. Demonstrates the share of net profit in the company's sales volume:
(92)
2 Return on equity ratio allows you to determine the efficiency of use of capital invested by the owners of the enterprise. Typically, this indicator is compared with possible alternative investments in other securities. Return on equity shows how many monetary units of net profit earned each unit invested by the company's owners:
(93)
3 Return on current assets ratio. Demonstrates the enterprise’s capabilities in ensuring a sufficient amount of profit in relation to the company’s working capital used. The higher the value of this coefficient, the more efficiently working capital is used:
(94)
4 Profitability ratio of non-current assets demonstrates the ability of the enterprise to provide a sufficient amount of profit in relation to the company's fixed assets. The higher the value of this coefficient, the more efficiently fixed assets are used:
(95)
5 Return on Investment Ratio shows how many monetary units the company needed to obtain one monetary unit of profit. This indicator is one of the most important indicators of competitiveness:
Business activity ratios allow you to analyze how effectively the company uses its funds. Among these ratios, indicators such as capital productivity are considered when it comes to non-current assets, turnover of working capital, as well as turnover of total capital.
In Fig. Figure 12.14 shows a flowchart for analyzing the financial condition of an organization. The financial condition of an enterprise is characterized by a system of indicators reflecting the availability, placement and use of financial resources; it is the result of the interaction of all elements of the system of financial relations and is determined by a set of production and economic factors. The purpose of a general analysis of the financial condition of an enterprise is a preliminary assessment of the financial condition based on the results of calculation and analysis of the dynamics of a number of financial indicators, the totality of which characterizes the spatio-temporal activities of the enterprise.
A preliminary assessment of the financial condition of an enterprise is made based on a study of:
— balance sheet currency dynamics - changes in the sum of the values of the assets and liabilities of the balance sheet. An increase in the balance sheet currency is considered normal. A decrease, as a rule, signals a decrease in production volume and can serve as one of the reasons for the insolvency of the enterprise;
— changes in the balance sheet asset structure— determination of the shares of immobilized non-current and mobile current assets, the cost of tangible working capital (an unreasonable overestimation of which leads to overstocking, and a deficiency of which leads to the impossibility of normal functioning of production), the amount of receivables with a maturity of less than a year and more than a year, the amount of free cash flow of the enterprise in cash (cash) and non-cash (settlement, foreign currency accounts) forms and short-term financial investments;
— changing the structure of the balance sheet liabilities. When analyzing the structure of the balance sheet liabilities (obligations of the enterprise), the ratio of borrowed and own sources of funds of the enterprise is determined (a significant share of borrowed sources, more than 50%, indicates the risky activity of the enterprise, which can cause insolvency), the dynamics and structure of accounts payable, its share in the liabilities of the enterprise;
— changes in the structure of inventories and costs of the enterprise. The analysis of inventories and costs is due to the importance of the “Inventories” section of the balance sheet for determining the financial stability of the enterprise.
The analysis identifies the most “significant” (having the greatest share) articles;
— changes in the structure of the financial results of the enterprise. The analysis assesses the dynamics of revenue and profit indicators, identifies and measures various factors that influence the dynamics of revenue and profit indicators.
Financial stability analysis
Analysis of financial stability comes down to calculating financial ratios (see Table 12.5).
To characterize the sources of inventory formation and costs, several indicators are used that evaluate various sources:
1) Availability of own working capital (SOS): SOS = “capital and reserves” - “non-current assets”.
2) Availability of own long-term borrowed sources of formation of reserves and costs, or functional capital (CF): CF = (“capital and reserves” + “long-term liabilities”) - “non-current assets”.
3) The total value of the main sources of formation of inventories and costs (VI): VI = “own and long-term borrowed sources” + “short-term loans and borrowings” - “non-current assets”.
Table 12.5 - Financial stability indicators
| Name indicator |
Calculation method |
Normal limitation |
Explanations |
| 1. Capitalization rate | K f1 = Sum of long-term and short-term liabilities ———————————— Capital and reserves |
Not higher than 1.5 | Indicates how much borrowed funds the company raised per 1 ruble. invested in assets own funds |
| 2. Coefficient of self-sufficiency financing |
K f2 = Capital and reserves - Non-current assets ————————— Current assets |
K f2 ?0.5 border 0.1 |
Shows what part of current assets is financed from own sources |
| 3. Financial independence ratio | K f3 = Capital and reserves ———————— Balance currency |
Shows the share of own funds in the total amount of funding sources | |
| 4. Funding ratio | K f4 = Capital and reserves ————————————— Amount of long-term and short-term obligations |
K f4 ?0.7 | Shows which part of the activity is financed at the expense of our own, and which at the expense of borrowed money. |
| 5. Financial stability ratio | K f5 = Capital and reserves + Long-term obligations ——————— Balance currency |
K f5 ?0.6 | Shows what part of the asset is financed from own funds |
The three above indicators of source availability
formation of reserves and costs correspond to three indicators of security
reserves and costs sources of formation:
1) surplus (+), lack (-) of own working capital;
2) surplus (+), lack (-) of own and long-term borrowed sources of formation of reserves and costs;
3) surplus (+), deficiency (-) of the total amount of the main sources for the formation of inventories and costs: +F = VI - ZZ, where ZZ is inventories and costs.
Using these indicators, the type of financial situation is determined (Table 12.6).
12.6 —Types of financial condition of an enterprise
| Indicators |
Financial type situations |
|||
| Absolutely sustainable financial state |
Normally stable financial state |
Unstable financial state |
Crisis financial state |
|
| F s SOS - ZZ |
F s? 0 | F s< 0 | F s< 0 | F s< 0 |
| F kf = KF - ZZ | F kf? 0 | F kf? 0 | F kf< 0 | F kf< 0 |
| F o = VI - ZZ | F o? 0 | F o? 0 | F o? 0 | F o< 0 |
An absolutely stable financial condition is characterized by full provision of reserves and costs with its own working capital.
A normal stable financial condition is characterized by the provision of reserves and costs with its own working capital and long-term borrowed sources.
An unstable financial condition is characterized by the provision of reserves and costs at the expense of own working capital, long-term borrowed sources and short-term loans and borrowings, i.e. due to all the main sources of reserve formation.
A crisis financial condition means that reserves are not provided by the sources of their formation: the enterprise is on the verge of bankruptcy.
Analysis of balance sheet liquidity, ratios
financial condition, business activity and profitability
Balance sheet liquidity should be distinguished from asset liquidity. Depending on the degree of liquidity, i.e. the rate of conversion into cash, the assets of the enterprise are divided into groups:
A 1 - the most liquid assets, these include all cash items of the enterprise and short-term financial investments;
A 2 - quickly realizable assets: accounts receivable, payments for which are expected within 12 months;
A 3 - slowly selling assets, including inventories, VAT, accounts receivable, payments for which are expected in more than 12 months. after the reporting date, and other current assets;
A 4 - difficult to sell assets: non-current assets.
Balance sheet liability items according to the degree of urgency of their payment are grouped as follows:
P 1 - the most urgent obligations: accounts payable;
P 2 - short-term liabilities - short-term borrowed funds, dividend payments;
P 3 - long-term liabilities: long-term loans and borrowings, as well as deferred income, consumption funds and reserves for future expenses and payments;
P 4 - permanent liabilities: stable items (capital, reserves). If there are losses, they are deducted.
The balance is considered absolutely liquid if the following ratios exist:
A 1? P 1; A 2? P 2; A 3? P 3; P 4? A 4.
The calculation and assessment of financial solvency ratios can be made according to the scheme (Table 12.7).
Table 12.7 - Calculation and assessment of financial condition ratios
|
Name indicator |
Calculation method |
Regulatory restriction |
Explanations |
| 1. General indicator of solvency | K p1 = A 1 + 0.5A 2 + 0.3A 3 ———————— P 1 + 0.5P 2 + 0.3P 3 |
||
| 2. Absolute coefficient liquidity |
K p2 = A 1: (P 1 + P 2) | To p2? 0.1 - 0.7 | Shows what part of the short-term the organization can repay the debt in the near future using cash |
| 3. Liquidity ratio ("critical assessment" coefficient) |
K p3 = | Acceptable value 0.7-0.8, preferably |
Shows what part of short-term the organization's obligations can be immediately repaid using the funds various accounts, in short-term securities, as well as receipts from settlements |
Continuation of the table. 12.7
| 4. Current ratio | K p4 = A 1 + A 2 + A 3 —————- |
Required value 1; optimal K p4 = 1.5 - 2 |
Shows what part of the current obligations on loans and settlements can be repaid by mobilizing all current facilities |
| 5. Maneuverability coefficient functioning capital |
K p5 = A 3:[(A 1 + A 2 + A 3)-(P 1 + P 2)] |
Decrease in indicator dynamics is a positive fact |
Shows which part of the functioning capital is immobilized in inventories and long-term receivables debt |
| 6. Share of working capital in | K p6 = A 1 + A 2 + A 3 —————— Balance currency |
To p6? 0.5 | Depends on industry organizations |
| 7. Equity ratio | K p7 = A 1 + A 2 + A 3 |
Not less than 0.1 | Characterizes the presence of its own working capital of the organization necessary for its financial stability |
The objectives of analyzing the coefficients of the financial results of the organization’s activities are to identify trends in changes
business activity, determined through the turnover and profitability of the organization (Table 12.8).
After analyzing the financial condition of the organization (enterprise), the conclusions are summarized and clarified, a general assessment of the financial condition of the organization and its changes over the analyzed period is given; the financial condition, changes in the structure of assets and liabilities of the organization, creditworthiness, dependence on borrowed capital, financial performance, profitability and business activity are stated. Then a general conclusion is made and recommendations are given to improve the financial condition of the organization, take measures to improve financial performance, and improve the financial strategy of the organization.
12.8 — Coefficients of financial results of the organization's activities
|
Name coefficient |
Calculation method |
Explanations |
|
A. General turnover indicators |
||
| 1. Total turnover ratio capital (resource productivity) |
K o1 = Sales proceeds ————————- Balance currency |
Shows the efficiency of use of property. Reflects speed turnover (in the number of turnovers for the period of the entire capital of the organization) |
| 2. Turnover ratio mobile means |
K 02 = Sales proceeds —————————- Current assets (revolutions) |
Reflects the turnover rate of all working capital of the organization (material and monetary) |
| 3. Intangible return ratio | K o3 = Sales proceeds —————————- Intangible assets (turnovers) |
This is the efficiency of use intangible assets |
| 4. Return on assets | F o = Sales proceeds —————————— Fixed assets |
fixed assets of the organization |
| 5. Return rate of own capital |
K o5 = Sales proceeds —————————- Capital and reserves (revolutions) |
Reflects the turnover rate of its own capital. How many rubles of revenue per 1 ruble invested? equity |
Continuation of the table. 12.8
|
B. Asset management indicators |
||
| 6. Turnover ratio material resources |
Cost price products sold ————————— Inventories and costs (revolutions) |
This is the number of inventory turnover and costs for the analyzed period |
| 7. Turnover ratio Money |
K y2 = Sales proceeds ————————— Cash (revolutions) |
Reflects the speed of cash turnover |
| 8. Turnover ratio funds in settlements |
K y3 = sales proceeds —————————- Accounts receivable speed (revolutions) |
loan provided by the organization |
| 9. Funds turnover period in calculations |
C o1 = (days) K y3 |
Shows the average term repayment of receivables |
| 10. Turnover ratio accounts payable |
K y4 = Sales proceeds ————————— Accounts payable femininity (turns) |
This is an expansion or decline in commercial loan provided to an organization |
| 11. Accounts payable turnover period debt |
C o2 = | Shows the average term repayment of accounts payable |
|
B. Profitability indicators |
||
| 12. Profitability of sales | K p1 = ———————- Revenues from sales |
Shows how much profit is due per ruble of products sold. A decrease in the coefficient indicates decrease in demand for the organization's products |
| 13. Return on total capital organizations |
K p2 = ———————- Balance currency |
Shows the effectiveness of use all property of the organization. The decrease indicates a fall in demand for products and over-accumulation of assets |
| 14. Profitability of non-current | K p3 = ———————- Fixed assets |
Reflects the efficiency of use non-current assets |
| 15. Profitability of own capital |
K p3 = ———————- Capital and reserves |
Shows the effectiveness of use own capital. The dynamics of the coefficient affects the level organization stock quotes |
Enterprise bankruptcy
Bankruptcy
- a complex process that can be characterized from various aspects: legal, managerial, organizational, financial, accounting and analytical, etc.
The bankruptcy procedure itself is only the final stage of the unsuccessful functioning of the company, which is usually preceded by the stages of normal rhythmic work and financial difficulties.
Modern economic science has in its arsenal a large number of different techniques and methods for forecasting financial indicators, including in terms of assessing possible bankruptcy. Let's consider three main approaches to forecasting the financial condition from the perspective of possible bankruptcy of an enterprise: a) calculation of the creditworthiness index; b) use of a system of formalized and informal criteria; c) assessment and forecasting of indicators of the satisfaction of the balance sheet structure.
The best known work in this area is the work of the Western economist E. Altman, who developed a calculation method creditworthiness index. This index allows, as a first approximation, to divide business entities into potential bankrupts and non-bankrupts.
In constructing the index, Altman examined 66 industrial enterprises, half of which went bankrupt between 1946 and 1965, and half of which were successful, and examined 22 analytical ratios that could be useful in predicting possible bankruptcy. From these indicators, he selected the five most significant for the forecast and built a multifactor regression equation.
Thus, the Altman index is a function of certain indicators characterizing the economic potential of an enterprise and the results of its work over the past period. In general credit index has the form:
Z = 3.3 K 1 + 1.0 K 2 + 0.6 K 3 + 1.4 K 4 + 1.2 K 5 ,
where are the indicators K 1, K 2, K 3, K 4, K 5 are calculated using the following algorithms:
Earnings before interest and taxes
K 1 = ——————————————————————————————;
Total assets
Revenues from sales
K 2 = ——————————————————————-;
Total assets
Equity (market valuation)
K 3= —————————————————————————————————;
Raised capital (balance sheet valuation)
Accumulated reinvested earnings
K 4 = —————————————————————-;
Total assets
Net working capital
K 5 = ————————————————————-.
Total assets
The critical value of the Z index was calculated by Altman based on statistical sampling data and amounted to 2.675. The calculated value of the creditworthiness index for a specific enterprise is compared with this value. This allows us to draw a line between enterprises and make a judgment about the possible bankruptcy of some (Z< 2,675) и достаточно устойчивом финансовом положении других (Z > 2,675).
Of course, deviations from the given criterion value are possible, so Altman identified an interval (1.81 - 2.99), called the “zone of uncertainty”, falling outside of which with a very high probability allows one to make judgments regarding the company being evaluated: if Z< 1,81, то компания с очевидностью может быть отнесена к потенциальным банкротам, если Z >2.99, then the judgment is exactly the opposite.
In the process of functioning, enterprises enter into systematic interaction with other economic entities, which include both individuals and legal entities. These interactions require financial support. To ensure production and commercial activities, an enterprise must have the necessary amount of financial resources that will allow it to pay off obligations to suppliers and contractors, to personnel, etc. within the terms established by the contract. At the initial stage of its operation, an enterprise can receive these financial resources from the founders, and in subsequent ongoing activities - from buyers, customers and lenders.
Financial condition of the organization - This is a comprehensive assessment of the availability of financial resources and the rationality of their attraction and placement.
The financial condition of an enterprise is the main characteristic of the enterprise’s business activity and its reliability. Reflecting the potential for realizing the economic intentions of participants in economic activities, defined in contracts, it determines the competitiveness of the enterprise and the level of its business cooperation.
The financial condition of the enterprise is expressed:
in the level of liquidity and solvency of the enterprise;
- - the degree of its financial stability;
- - rationality of the structure of assets and liabilities, i.e. enterprise funds and their sources;
- - efficient use of property and profitability of products.
Indicators of the financial condition of an organization can be supplemented by various indicators related to one or another group; the grouping of financial condition indicators may also change, but their essence and meaning remain unchanged.
Solvency and liquidity of the enterprise
Under solvency of the enterprise is understood as its ability to timely and fully make payments on its short-term obligations to counterparties: suppliers and contractors, lenders, workers and employees, the budget and extra-budgetary funds.
Solvency is ensured by the assets available to the enterprise: cash and cash equivalents, accounts receivable (or expected cash receipts), short-term financial investments, inventories (raw materials, materials, finished products). These funds participate in the repayment of obligations in different ways. While cash and cash equivalents can be immediately distributed to counterparties, accounts receivable and inventory must be converted into cash, which takes time.
The period during which inventories and receivables can be converted into cash varies, which led to the introduction of such a concept as liquidity. The term "liquidity" (from Lat. - flowing, liquid) was borrowed from the German language at the beginning of the 20th century. Liquidity meant the ability of assets to be mobilized quickly and easily.
Currently, liquidity refers to the ability to transform an asset into cash. This ability is due to three main factors: firstly, the temporary nature of the technological process (its duration), secondly, the financial policy of the enterprise in settlements with buyers and customers, thirdly, the financial discipline of buyers and customers, fourthly, the demand for financial investments in the securities market.
Depending on the degree of liquidity of the enterprise’s assets, they are divided, as a rule, into four main groups:
A) - the most liquid assets: cash in hand, in settlement, foreign currency and special accounts in banks. This group includes financial resources that can be immediately used by the enterprise to fulfill its obligations;
A2 - quickly realizable assets: cash equivalents, short-term financial investments, short-term receivables. Financial assets of this group are characterized by the fact that their transformation into cash requires a certain time, but it does not last long:
A3 - slow-selling assets: long-term accounts receivable, value added tax presented to the enterprise by suppliers and contractors, raw materials and materials, work in progress, finished products, goods, etc.;
A4 - hard-to-sell assets: fixed assets, investments in tangible assets, intangible assets, long-term financial investments.
Experts differ in determining the composition of asset groups. First of all, to group A! It is proposed to include cash equivalents and short-term financial investments. However, it takes some time to transform these assets into money, so they need to be separated from funds that do not require time to transform at all. It is proposed to include all receivables in group A2. But due to the fact that it is long-term (maturity period - more than 1 year after the reporting date) and short-term in nature, it is also advisable to divide it into quickly realized and slowly realized. The last group A4 is not identified by all experts, since it is not involved in the calculation of liquidity ratios. However, it is presented here in order to present the classification of all property of the enterprise according to the degree of liquidity.
The calculation of liquidity ratios is based on a comparison of various groups of enterprise assets with accounts payable that are subject to repayment in the short term.
Liabilities to counterparties or accounts payable are grouped in the balance sheet according to the degree of urgency of their return into two groups:
P, - short-term liabilities: accounts payable, estimated liabilities and borrowed funds and other liabilities;
P2 - long-term liabilities: borrowed funds, estimated liabilities, deferred tax liabilities and other liabilities.
Only obligations of the first group are involved in assessing the liquidity and solvency of the enterprise.
Dividing assets into three main groups (A, A2 A3) according to the degree of liquidity allows us to construct three main relative indicators or coefficients characterizing the solvency of the enterprise.
Current ratio (Ktl) characterizes the overall assessment of the liquidity of the enterprise and shows how many rubles of the enterprise’s working capital are accounted for by one ruble of short-term accounts payable.
The current liquidity ratio is calculated using the formula
A value of the current liquidity ratio exceeding 1 indicates an excess of current assets over accounts payable and shows the ability of the enterprise to carry out its activities, even if individual debtors do not fulfill their payment obligations in a timely manner or unforeseen failures occur in the production process or sales of products.
The values of the indicator vary by industry, type of activity, and in seasonal industries, which include agriculture, by periods of the production cycle.
Quick liquidity ratio (K0) also characterizes the liquidity of the enterprise, but shows how many rubles of quickly realizable assets account for one ruble of short-term liabilities:
Experts suggest setting the approximate value of this indicator at level 1, which reflects the balance sheet ratio of credit received from suppliers and credit provided to customers. In practical activities, the deviation of this indicator from unity depends on various factors: the current situation on the market for purchased materials and the product sold, on the professional level of the enterprise’s management, on the situation in the financial market. When analyzing the dynamics of this indicator, it is necessary to determine the impact on it of an unjustified increase in accounts receivable.
Absolute liquidity ratio (Cal) reflects that part of short-term accounts payable that can be repaid immediately and is calculated using the formula
The absolute liquidity ratio reflects the solvency of the enterprise at a certain reporting date and depends on the availability of funds on that date. The amount of available cash at the reporting date depends on many factors and does not always reflect the normal situation for the enterprise. To calculate the absolute liquidity ratio, it is advisable to use in the numerator the average daily balance of funds in bank accounts and in cash for a certain period of time and relate it to short-term liabilities, which are a more stable value.
The liquidity of an enterprise is also characterized by the absolute indicator of net working capital (the value of its own working capital) (CN(W), which reflects the part of the enterprise’s own capital that is aimed at the formation (financing) of its current assets.
Net working capital is calculated using the formula
Kchok = Current assets (total of section II of the balance sheet) - short-term liabilities (total of section V of the balance sheet).
Net working capital shows how much current assets will remain at the disposal of the enterprise administration after the repayment of all short-term liabilities.
To determine the ability of an enterprise to repay obligations, indicators such as EBIT (Earnings before Interest and Taxes) - earnings before accrued interest and taxes, EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) - earnings before interest, taxes, depreciation and amortization and OIBDA (Operating Income before depreciation and amortization) - operating profit before depreciation of fixed assets and intangible actinon.
Earnings before interest and taxes EBIT represents the financial result obtained from operating activities and is determined by the formula
EB1T= Revenue - Cost - Selling expenses - Administrative expenses.
In order to determine whether the debt load of an enterprise is adequate to its financial results, the indicator is used EBITDA which is different from EBIT by the amount of accrued depreciation (Depreciation and Amortization), those. Amounts of capitalized funds consumed in the reporting period:
EBITDA = EBIT+ Depreciation.
Creditors based on EBITDA can determine how much interest payments the company can repay in the near future.
EBIT used to calculate indicators such as interest coverage ratio, cash payment coverage ratio:
- - EBIT/ interest;
- - EBITDA/ interest;
- - EBIT/ interest + expenses for finance lease;
- - EBITDA/ interest + finance lease expenses;
- - Net debt / EBITDA.
Net debt is calculated as the difference between the amount of liabilities and the amount of cash and cash equivalents:
Net debt (Net Debt) = Liabilities (TotalDebt) - Cash and cash equivalents (Cash & Cash Equivalents).
Odds EVGT And EBITDA help to cordon off not only the level of protection of creditors from non-payment of debts by the borrower, but also the efficiency of enterprise management, since such cost items as accrued interest, tax deductions and depreciation are less dependent on managers than the costs of materials, wages and others. When analyzing the performance of managers, you should also use indicators that are calculated without taking into account these costs. That's why EBITDA as an indicator where these costs are excluded can be used for appropriate analysis.