Financial ratios are the key to a successful analysis of the company's solvency

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:40

For a more stable and efficient operation of the enterprise, it is necessary to analyze the state of its work. The financial ratios obtained as a result of the study help to find weak links in the activity of the organization and allow you to determine the benefits of its actions. It is these data that give a detailed picture of the state of affairs in the company.

The financial condition (position) of an enterprise depends primarily on the ratio of borrowed capital to equity. In this regard, determine:

• coefficient (level) of financial autonomy - while calculating the share of equity in the total amount of funds of the organization;
• coefficient (level) of financial dependence - here we are talking about what share in the total amount of the company's cash is borrowed (borrowed) capital. The indicator can be calculated in terms of time frames. That is, it is permissible and possible to determine this index based on the long-termor short-term borrowed funds;
• the level (ratio) of financial risk, also known as the leverage of financial leverage - here the ratio of borrowed funds to equity capital is considered. At the same time, there is another name for this index - the financial activity ratio.

Accordingly, the higher the value of the first proportion, the better and more stable the financial condition (position) of the enterprise, if we consider it in terms of credit debts and equity. In ideal systems, the weight of this indicator should tend to one.

To determine the profitability of attracting funds and capital from outside, another indicator is used - this is the effect of financial leverage. This index shows how much the return on equity of an enterprise will increase if borrowed funds are attracted.

Financial ratios that absolutely accurately reflect the state of affairs at the enterprise are solvency ratios. In simple terms, this data shows how likely the company is to repay its short-term debts.

Solvency is assessed based on data on the liquidity of its current assets - the ability to repay obligations on loans and debts using the company's assets.

The following financial ratios are used for analysis:

• current liquidity - also calledcoverage index. It characterizes the organization's ability to repay short-term credit obligations with its own available current assets;
• intermediate (quick) liquidity - shows how possible it is to repay obligations with your term assets (cash held in the organization's operating accounts, stocks in warehouses, short-term debt of debtors);
• absolute liquidity - the final value of this indicator describes how likely it is to pay off short-term credit loans from funds placed on the company's settlement accounts and other financial investments placed for a short period.

These financial ratios are the most important in calculating the solvency and financial position (state) of the enterprise.