Analysis of financial stability
Questions: Types of financial stability. Net assets. The relative financial stability indicators. Financial leverage. Production leverage. Ways to enhance the financial stability
Types of financial stability
There are four types of financial stability: absolute stability (if stocks less than the sum of planned sources of their formation); normal resistance (in which the solvency of the company is guaranteed); unstable (which interferes with the balance of payments, but still may be possible to restore the balance of payment instruments and obligations); crisis (the company is on the verge bankrostva).
An important indicator in determining the stability of the enterprise is the sum of net assets. Net assets - this is the real value of equity. It shows that the owners of the company will remain after payment of all obligations in the event of liquidation.
Net assets = Total assets - Taxes on acquired assets - Debt founders of contributions to the share capital - Cost of treasury shares from shareholders - Target funding and income - Long-term financial liabilities - Short-term financial obligations.
It should be borne in mind that the net asset value is rather conventional, as calculated on the basis not of the liquidation balance and balance sheet in which assets are carried at market did not, and at discount prices. Nevertheless, their value must be greater than the share capital.
If the net assets less the value of share capital corporation necessarily reduce its share capital to the value of its net assets. And if the net assets of less than the minimum amount of the authorized capital, in accordance with the legislative acts it must decide to self-destruct. With the unfavorable ratio of net assets and the authorized capital of effort should be made to increase the net income and profitability, debt repayment founders of contributions to the charter capital.
The relative financial stability indicators
The financial condition of the company, its stability depends largely on the optimal structure of capital sources, ie the ratio of debt to equity, from the optimal structure of the company's assets, and primarily on the ratio of fixed and current assets, as well as the balance of assets and liabilities of the company.
Therefore, you must first analyze the structure of venture capital sources and assess the degree of financial stability and financial risk. For this purpose, calculated:
- Coefficient of autonomy (independence) - that is, the proportion of equity in the balance sheet;
- The dependency ratio - ie the share of debt capital in the balance sheet;
- Current debt ratio - ie the ratio of short-term financial liabilities to the balance sheet;
- Financial stability ratio (long-term financial independence) - that is, the ratio of equity and long-term debt to the balance sheet;
- Debt service coverage ratio equity (solvency ratio) - that is, the ratio of equity to debt;
- Financial leverage ratio (ratio of financial risk) - ie the ratio of debt to equity.
The higher the level of the coefficients (autonomy, financial stability, covering debt equity), and the lower the level of the coefficients (depending, current debt, financial leverage), the stability of the financial condition of the company. Financial leverage is also called "leverage financial leverage."
For banks and other creditors preferred is when the share of equity in higher customer, eliminating the financial risk. Companies interested in debt financing for two reasons:
- Interest on borrowed capital maintenance are treated as expenses and are not included in taxable income;
- Interest expense is usually lower than the income generated from the use of borrowed funds in the company's turnover, resulting in increased return on equity.
In a market economy, a large and increasing proportion of equity does not mean the advancement of enterprise capabilities to respond quickly to changing business climate. On the contrary, the use of borrowed funds indicates flexibility of the enterprise, its ability to find and return their loans, that is, its credibility in the business world.
The ratio of debt and equity funds almost non-existent. The level of financial leverage depends on the industry characteristics of the enterprise. In those industries where slow-moving capital and a high proportion of long-lived assets, financial leverage should not be high. In other industries, where the capital is turned over quickly and equity ratio is low, it may be much higher. Financial leverage not only an indicator of financial stability, but also has a great influence on the increase or decrease in the value of income and equity of the enterprise. Financial leverage, ie the ratio of debt to equity capital is precisely the lever with which increases the positive or negative effect of financial leverage. The level of financial leverage shows how many times the growth rate of net income exceeds the rate of growth of the balance of income. This excess is ensured due to the effect of financial leverage, one of whose components is his shoulder, that is, the ratio of debt to equity. Increasing or decreasing the shoulder of financial leverage depending on the prevailing conditions, it is possible to influence the income and return on equity.
Financial stability of the enterprise is determined by the level of production and leverage. Production is also called leverage operating leverage. Its level indicates the degree of sensitivity to changes in income production. It is determined by the ratio of the rate of growth of income before interest and taxes to the growth rate of sales. With its high-value, even a slight decline or increase in production leads to a significant change in income. A higher level of leverage industrial enterprises typically has a higher level of technical equipment production. By increasing the level of technical equipment is an increase in the proportion of fixed costs and the level of production of leverage. With the growth of the latter increases the risk of shortfall in revenue required to recover fixed costs. The greatest value of the coefficient of leverage has the production company has a higher ratio of fixed to variable costs.
To determine the stock of financial stability it is necessary to deduct from the proceeds breakeven sales volume and divide the result by revenue.
Break-even sales volume is determined by dividing the fixed costs in the cost of goods sold at a fraction of marginal income in revenue.
Need to constantly monitor the supply of financial stability, to find out how close or far profitability threshold below which should not fall the company's revenue. This is a very important indicator to assess the financial stability of the company.
Ways to enhance the financial stability
Ways to enhance the financial stability:
- Acceleration of capital turnover;
- A reasonable decrease in inventories and costs;
- The completion of its own working capital from internal and external sources.
Questions for self-control
1. What types of financial stability?
2. How are the net assets?
3. What are the relative indicators characterizing the financial stability of the enterprise?
4. What is meant by financial leverage?
5. What is meant by the manufacturing leverage?
6. How is the stock of financial stability?
7. What are the main ways to improve the financial sustainability of the enterprise.