Financial Sustainability Analysis
Analysis of financial stability in economic practice is carried out using different approaches based on the study:
• structures of sources of formation of the organization's resources;
• indicators of the structure of its economic resources;
• Ensuring the economic resources of business sources of financing.
Such an economic entity that finances its assets from its own resources (fixed assets, intangible assets, working capital), is financially stable, does not allow unjustified receivables and payables and pays in time for its obligations. The basis for financial sustainability is the rational organization and use of working capital. Also, the financial stability of the enterprise is related to the degree of independence from external influences, primarily, with a degree of independence from creditors.
The approach based on the study of the structure of the sources of the formation of enterprise funds
One of the most important indicators characterizing the financial stability of an enterprise is the coefficient of autonomy (the coefficient of financial independence, the coefficient of concentration of equity, the coefficient of ownership, the coefficient of independence). The coefficient of autonomy is calculated by the formula
This ratio shows the share of equity in the organization's capital. In order to maintain a stable financial structure, the share of equity in liabilities should exceed the share of borrowed funds (ie, the autonomy ratio should be greater than or equal to 0.5). Such a value of the indicator gives grounds to assume that all the obligations of the enterprise can be covered at the expense of its own funds.
The growth of the autonomy ratio testifies to the increase in financial independence, increases the guarantees of repayment by the enterprise of its obligations and extends the possibility of raising funds from outside, the possibility of investing in the enterprise. Changes in the level of the coefficient of autonomy can also testify to the expansion or reduction of the activity of the enterprise (its business activity).
A large amount of borrowed capital can be justified when an enterprise takes a loan and develops it, which will bring a significant profit in the near future.
Based on this normal for a financially sustainable enterprise, the value of this indicator is equal to 0.5-0.8.
On the other hand - many large United States enterprises that have existed for a long time have a high value of the autonomy ratio. In this case, it is necessary to analyze the structure of own capital. In such enterprises, the main share of equity is, as a rule, not profit, but additional capital received from the revaluation of fixed assets. Given that revaluation is usually performed not on the basis of market value, but according to specially established coefficients, this indicator may not reflect the actual reality. In this case, it is recommended to analyze the modified autonomy ratio:
Modified autonomy ratio = (equity capital - additional capital)/balance currency.
Its analysis should be performed using the same criteria as for the standard autonomy ratio.
In addition to the autonomy ratio, the following indicators can be used to measure the ratio of equity and debt obligations, measured in fractions of a unit or in percentages.
Coefficient of financial dependence = 1/autonomy ratio = balance currency/equity.
Its value can be from 1 to 2.
Financial leverage = 1 - autonomy ratio = borrowed liabilities/balance currency.
It must be between 0 and 0.5.
Debt-to-equity ratio (leverage lever) = debt/equity.
Given that the liabilities should not exceed own capital, this indicator should not exceed 1. The higher the level of this indicator, the higher the dependence of the firm on creditors and the more unstable its financial position, therefore for this coefficient there is a restriction: from 0 , 5 to 1. In accordance with the Methodological recommendations for the development of the financial policy of the enterprise, approved by order of the US Department of Economics on 01.05.1997 No. 118, this coefficient should not exceed 0.6.
Coefficient of financial stability (financing ratio) = equity/debt liabilities = 1/leverage of the financial lever.
Its optimal value is 2: 1.
Coefficient of permanent capital concentration = permanent capital/balance currency = (equity + long-term liabilities)/balance currency.
From the limit for the autonomy ratio it follows that this indicator should be at least 0.5.
This indicator also characterizes financial stability, but unlike the autonomy ratio for it, we can determine the time frame: the permanent capital concentration factor characterizes the financial reliability of the enterprise for the next year (or another period for which long-term obligations are provided), and if the value long-term obligations is significant, and there is little equity, we can say that the company is stable within the next year. However, in a year, when, for example, the repayment term of a long-term loan will come, the firm may turn out to be both unstable and insolvent.
Long-term borrowing ratio = long-term liabilities/permanent capital = long-term liabilities/(equity-long-term liabilities).
This coefficient allows us to estimate the share of funds in the financing of capital investments.
Share of current liabilities in equity = current liabilities/balance sheet balance.
This indicator characterizes the amount of short-term liabilities in all liabilities of the enterprise. The higher their share, the more we depend on creditors, the less stable financial position the company takes. Taking into account the fact that the size of long-term liabilities is usually insignificant at United States enterprises, it is necessary to pay great attention to the analysis of short-term liabilities.
The reasonableness of the conclusions regarding the rationality of the structure of the sources of financing of entrepreneurial activity depends entirely on the reliability of the information sources (accounting statements), the misstated evaluation of any element of assets or liabilities distorts and estimates equity. In addition, financial ratios should be considered taking into account the industry specificity of the enterprise, the duration of the operational cycle, the scale of activity and factors of turnover of circulating assets. It is also necessary to take into account the following rules, resulting from the formalization of the calculation of indicators and proven in practice:
1) enterprises in which a significant proportion of property is occupied by real estate or hard-to-implement assets in working capital, must have a large share of equity capital;
2) enterprises that have a large share of fixed costs in the total amount of costs have a higher critical sales volume (threshold of profitability) and must have a correspondingly larger amount of equity:
3) enterprises that have a high turnover rate can have a large share of borrowed funds without threatening their solvency and increasing risks for creditors;
4) when evaluating the rationality of the capital structure, it is necessary to take into account the ratio of the duration of the operational cycle and the maturity of accounts payable: the longer the operating cycle is serviced by the creditor's capital, the smaller the share of equity capital may be in the enterprise;
5) the structure of the aggregate capital is also influenced by the conjuncture of the commodity market: a stable demand for products, works or services allows the enterprise to attract a larger share of borrowed capital;
6) the structure of capital is largely determined by the policy of owners and managers of the top echelon.
Thus, well-founded conclusions about the optimality of the capital structure can be made only if all the factors in the aggregate are taken into account to form the target structure of the capital of the particular enterprise, including the evaluation of the terms of attraction, volumes and terms.
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