The system of indicators characterizing the financial condition of the enterprise, and their analysis
In the process of analysis, a system of financial coefficients is used. Possession of the methodology of interpreting their behavior allows the analyst to see the problem, to assess the consequences of its development and to think in due time the ways of its solution.
The use of financial coefficients, divided into separate groups, makes it possible to present information in the most convenient form for its understanding. The fact that financial ratios are relative indicators allows for the assessment of dynamics, as well as for industry comparisons.
Financial ratios are most widely used:
• when analyzing the dynamics of indicators that characterize the financial state of the organization;
• evaluation of trends in the behavior of indicators in the process of predictive calculations;
• industry comparisons.
At the same time, the calculation of financial ratios is a technique, the success of which is largely determined not so much by the possession of the calculation technique, as by the ability to understand the information used and the ability to analytically interpret the results of calculations. Otherwise, the use of this tool is more arithmetic than economic.
Using the results of calculations of financial ratios, the analyst should correlate the obtained value of the indicator with a specific economic reason (s). This allows to broaden the horizons of the idea of the financial state of the analyzed organization and its financial stability.
Indicators of liquidity and current solvency
One of the most important objects of the analysis of the financial state of the organization is its solvency. In the practice of analysis, long-term and current solvency are distinguished. By long-term solvency is understood the ability of the enterprise to settle for its obligations in the long term. The ability of the organization to settle for its short-term obligations is called current solvency. In other words, an organization is considered solvent when it is able to meet its short-term obligations using current assets.
The reason that in analyzing current solvency is primarily focused on current assets, is that fixed assets are not considered as sources of repayment of current liabilities of the organization due to its special functional role in the production process and, in addition, the difficulties of their urgent implementation.
The current solvency of the organization is directly influenced by the liquidity of its current assets (the ability to convert them into cash or use to reduce liabilities). Data for the analytical balance sheet are used for preliminary assessment of such liquidity. Current assets may be liquid to varying degrees, as they consist of heterogeneous funds, among which are both readily available and difficult to meet to pay off foreign debt. In this regard, it is advisable to conditionally divide the articles of current assets depending on the degree of their liquidity into three groups:
1) liquid funds in immediate readiness for sale (cash, highly liquid securities - cash equivalents);
2) liquid funds at the disposal of the enterprise (short-term financial investments less cash equivalents, short-term obligations of customers and inventories of inventory);
3) illiquid funds (requirements for debtors with a long term of formation, doubtful accounts receivable, long-term work in progress and future expenses).
The proportion in which these groups should be relative to each other is determined by: the nature and scope of the organization; speed of turnover of enterprise funds; the ratio of current and non-current assets; the amount and the urgency of the obligations to which the articles of the asset are intended; degree of liquidity of current assets.
The assignment of certain items of working capital to these groups may vary depending on the specific conditions. As part of the debtors of the company are very diverse receivables and one part of it can get into the second group, another - in the third. For different lengths of the production cycle, work in progress can be assigned to either the second or the third group, etc.
In turn, in the structure of short-term obligations can be identified obligations of varying degrees of urgency. Therefore, one of the ways to assess liquidity at the stage of preliminary analysis is to compare certain elements of the asset with elements of liabilities. To this end, the company's liabilities are grouped according to the degree of their urgency, and its assets by the degree of liquidity (realizability).
In the process of analysis, the most urgent obligations of an enterprise (the payment date of which comes in the current month) should be compared with the value of assets that have the maximum liquidity (cash, easy-to-sell securities). Part of the immediate obligations that remain uncovered must be balanced by less liquid assets - the receivables of enterprises with a stable financial position, easily realizable inventories and other negotiable assets that can be considered highly liquid for a specific enterprise.
Other short-term obligations can be correlated with assets such as other debtors, finished goods, production inventories. On the extent to which the correspondence between these groups of assets and liabilities is ensured, the solvency of the enterprise depends to a large extent.
The following key indicators of liquidity are used in the analysis of financial statements.
Absolute liquidity ratio (maturity factor) is calculated as the ratio of cash and cash equivalents to short-term debt. To calculate the indicator, an analytical balance is used, the methodology for compiling it was reviewed earlier.
Adjusted liquidity ratio (interim) is defined as the ratio of cash and cash equivalents, short-term financial investments and receivables to short-term liabilities.
where DS - cash and cash equivalents, FV - short-term financial investments (net of cash equivalents), DZ - short-term receivables.
This indicator characterizes that part of the current liabilities, which can be repaid not only at the expense of cash, but also at the expense of expected receipts for shipped products, work performed or services rendered.
Current Ratio is the ratio of all current assets to short-term liabilities. It allows you to determine how many current assets cover short-term liabilities. The greater the value of current assets relative to current liabilities, the greater the confidence that existing liabilities will be repaid from existing assets.
It is rather difficult to justify the recommended value of this indicator in isolation from business. It is clear that its magnitude will vary depending on the scope of the enterprise. So, due to objective reasons - a significant proportion of hard-to-find assets, for example, work in progress in the working capital, duration of the operational cycle of industrial and construction companies - a higher current ratio is needed than for the companies in the sphere of trade, supply and sale.
It is important to keep in mind that the values of liquidity ratios fluctuate by industry and depend on a number of factors, primarily current assets and their liquidity. However, by simplifying the situation, it is generally accepted that the minimum permissible values of the coefficients are: current liquidity 2-2.5, intermediate liquidity ratio 0.7-0.8, absolute liquidity ratio 0.2-0.25. Of course, with respect to specific enterprises, these values can be refined.
The liquidity ratios considered have certain drawbacks, primarily such as:
• Static - these indicators are calculated on the basis of balance sheet data that characterize the property position of an enterprise by its state on a specific date, hence they are simultaneous. Hence the need to analyze their dynamics over several periods and calculate their average values over longer periods;
• low informativeness for forecasting future cash receipts and payments, which is the main task of analyzing current solvency;
• availability of liabilities not reflected in the balance sheet (for example, sureties or guarantees) and not taken into account when calculating liquidity ratios. As a consequence, ignoring possible payments in the future can lead to a significant understatement of promising assessments of solvency.
A more detailed analysis of current solvency involves the use of additional tools to refine the results of the analysis. The main issues that need to be clarified in this analysis are:
• qualitative composition of current assets and current liabilities;
• the turnover rate of current assets and its correspondence to the current liabilities turnover rate
• Accounting policy for valuation of assets and liabilities. To analyze the current solvency, the dynamics of the indicator characterizing the difference in current assets and short-term liabilities is very important. This indicator was called net current assets. In the process of analyzing it, we first of all need to evaluate the reasons for its change, bearing in mind that its systematic growth may indicate an excess of its own working capital, and a decrease may characterize the insufficiency of its own working capital.
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