Liquidity balance. Solvency analysis and diagnostics of the risk of bankruptcy of an enterprise by its assets
One of the most important indicators of the effectiveness of an organization is liquidity. The objective of the analysis of balance sheet liquidity arises in connection with the need to assess the creditworthiness of the organization, i.e. her ability to timely and fully pay off her obligations.
The liquidity of the balance sheet is defined as the degree to which the organization’s obligations are covered by its assets, the period for which they are converted into money corresponds to the maturity date of the obligations. Liquidity is the ability of a company:
- quickly respond to unexpected financial problems and opportunities,
- increase assets with an increase in sales,
- repay short-term debt through the usual conversion of assets into cash.
There are several degrees of liquidity. So, lack of liquidity, as a rule, means that the company is not able to take advantage of the discounts and emerging profitable commercial opportunities. At this level, a lack of liquidity means that there is no freedom of choice, and this limits the freedom of action of management. A more significant lack of liquidity leads to the fact that the company is not able to pay its current debts and obligations. The result is an intensive sale of long-term investments and assets, and in the worst case, insolvency and bankruptcy.
For owners of the enterprise, insufficient liquidity can mean a decrease in profitability, loss of control and a partial or complete loss of capital investment. For lenders, insufficient debtor liquidity may mean a delay in the payment of interest and the principal amount of the debt, or a partial or complete loss of the borrowed funds. The current state of liquidity of a company may also affect its relations with customers and suppliers of goods and services. Such a change may result in the inability of the enterprise to fulfill the terms of the contracts and lead to the loss of relations with suppliers. That is why liquidity is so important.
If an enterprise cannot repay its current liabilities as they become due, their continued existence is called into question, and this puts all other performance indicators into the background. In other words, the disadvantages of financial management of the project will lead to the risk of suspension and even its destruction, i.e. to the loss of investor funds.
Liquidity characterizes the ratio of various articles of current (current) assets and liabilities of the company and, thus, the availability of free (not related to current payments) liquid resources.
Depending on the degree of liquidity, the assets of the enterprise are divided into the following groups:
- A1. The most liquid assets. These include all cash items of the enterprise and short-term financial investments. This group is calculated as follows: A1 \u003d line 250 + line 260;
- A2. Quickly sold assets - accounts receivable, payments on which are expected within 12 months after the reporting date. A2 \u003d line 240;
- A3. Slow-moving assets - Section II of the balance sheet asset, including inventories, value added tax, receivables (payments for which are expected more than 12 months after the reporting date) and other current assets. A3 \u003d line 210 + line 220 + line 230 + line 270;
- A4. Hard-to-sell assets - Section I of the balance sheet asset - non-current assets. A4 \u003d line 190.
Liabilities balance are grouped by the degree of urgency of payment:
- P1. The most urgent obligations; these include accounts payable. P1 \u003d line 620;
- P2. Short-term liabilities are short-term borrowed funds, etc. P2 \u003d line 610;
- P3. Long-term liabilities are balance sheet items related to sections V and VI, i.e. long-term loans and borrowings, as well as deferred income, consumption funds, reserves for future expenses and payments. P3 \u003d line 590 + line 630 + line 640 + line 650 + line 660;
- P4. Permanent or stable liabilities are Articles IV of the balance sheet section “Capital and Reserves”.
To determine the balance sheet liquidity, the results of the given groups by asset and liability are compared.
The balance is considered absolutely liquid if the following ratios occur:
- A1 is greater than or equal to P1;
- A2 is greater than or equal to P2;
- A3 is greater than or equal to P3;
- A4 is less than or exactly P4.
If the first three inequalities are fulfilled in this system, this entails the fulfillment of the fourth inequality, so it is important to compare the results of the first three groups by asset and liability. It is also important to note that the lack of funds in one group of assets cannot be compensated for by their excess in another group, i.e. less liquid assets cannot replace more liquid ones.
Based on these comparisons, the following indicators can be calculated:
- current liquidity \u003d A1 + A2 - P1 - P2;
- prospective liquidity \u003d A3 - P3.
The main indicators of liquidity in domestic analysis are:
- total liquidity ratio L1 \u003d (A1 + 0.5A2 + 0.3A3) / (P1 + 0.5P2 + 0.3P3). The normal value is greater than or equal to 1. Using this coefficient, the most general assessment of changes in the financial situation of the company in terms of liquidity occurs;
- absolute liquidity ratio L2 \u003d A1 / (P1 + P2). The optimal coefficient is 0.25, the minimum allowable is 0.1. Shows how much of the short-term debt the organization can repay in the near future at the expense of cash;
- coefficient of critical assessment L3 \u003d (A1 + A2) / (P1 + P2). The optimal coefficient is greater than or equal to 1.5, the acceptable value is 0.7-0.8. It shows how much of the organization’s short-term liabilities can be immediately repaid at the expense of funds in various accounts, in short-term securities, as well as income from settlements;
- current ratio L4 \u003d (A1 + A2 + A3) / (P1 + P2). The optimal coefficient, depending on industry, varies in the range of 1.5-2.5. The minimum allowable ratio is 1. The value of the current liquidity ratio less than 1 means that at the moment the company is definitely insolvent, because the liquid funds at her disposal are insufficient to cover even current liabilities, without taking into account interest on the loan;
- maneuverability coefficient of functioning capital L5 \u003d А3 / (А1 + А2 + A3) - (П1 + П2). A decrease in this coefficient in dynamics is noted as a positive factor. Maneuverability coefficient shows how much of the operating capital is immobilized in inventories and long-term receivables;
- the share of current assets in assets L6 \u003d (A1 + A2 + A3) / B (where B is the balance sheet total). The value of this coefficient depends on the industry affiliation of the organization;
- equity ratio L7 \u003d (P4 - A4) / (A1 + A2 + A3). Criterion value not less than 0.1. It characterizes the availability of working capital of the organization, necessary for its financial stability.
Total liquidity ratio (L1). Using this indicator, an assessment of changes in a financial organization in terms of liquidity is carried out. This indicator is also used when choosing the most reliable partner from among many potential partners based on reporting.
Absolute liquidity ratio (L2) shows the ability of an enterprise to pay off its obligations immediately. In Western Europe, it is considered sufficient to have a liquidity ratio of more than 0.2. Despite the purely theoretical significance of this coefficient (it is unlikely that an enterprise will have to respond at once to all its obligations), it is desirable to have it sufficient.
The critical assessment coefficient (L3) is also outside the norm at the end of the period.
The maneuverability coefficient (L5) shows how much of the functioning capital is immobilized in inventories and long-term receivables. A decrease in this indicator over time is a positive factor for the enterprise.
The coefficients considered by themselves do not carry a serious semantic load, however, taken over a number of time intervals, they fully characterize the operation of the enterprise during the implementation of the project for which the business plan has been drawn up.
When calculating the analytical coefficients characterizing the operation of the enterprise, it is necessary to keep in mind that they are integral in nature and for more accurate calculation it is advisable to use not only the balance, but also the data contained in order books, statements, and other information.
Finally, the role of the current ratio (L4) in the analysis of the project. It allows you to determine the multiplicity of current assets cover current liabilities. If the ratio of current assets and short-term liabilities is lower than 1: 1, then we can talk about the high financial risk associated with the fact that the organization is not able to pay its bills.
The current liquidity ratio (L4) summarizes the previous indicators and is one of the indicators characterizing the satisfactory (unsatisfactory) balance sheet.
The results of a firm's liquidity analysis are of interest primarily to commercial lenders. Since commercial loans are short-term, it is precisely liquidity analysis that best allows us to evaluate the ability of a company to pay these obligations.
A general indicator of liquidity is the sufficiency (excess or deficiency) of sources of inventory. The meaning of analysis using absolute indicators is to check which sources of funds and in what volume are used to cover stocks.
The need for analysis of balance sheet liquidity arises in market conditions due to increased financial constraints and the need to assess the creditworthiness of an enterprise. The liquidity of the balance sheet is defined as the degree to which the liabilities of the enterprise are covered by its assets, the period of converting of which into cash corresponds to the maturity of the obligations. Asset liquidity is the reciprocal of the liquidity of the balance sheet over the time that assets are converted into cash. The less time is required for this type of asset to take on a monetary form, the higher its liquidity. The balance sheet liquidity analysis consists in comparing assets on an asset, grouped by their degree of liquidity and arranged in decreasing order of liquidity, with liabilities on liabilities, grouped by their maturity and arranged in increasing order of time. The following groupings are carried out in relation to the balance sheet.
Depending on the degree of liquidity, i.e., the rate of conversion into cash, the assets of the enterprise are divided into the following groups:
The most liquid assets (A1) are funds, the period of conversion of which into cash does not exceed three months. These include cash (p. 260 of the balance sheet) and short-term financial investments (p. 250).
Fast-selling assets (A2) are funds with a cash conversion period of three to six months. These include receivables, payments for which are expected within 12 months after the reporting date (page 240 of the balance sheet).
Slow-moving assets (А3) are funds with a cash conversion period of six months to a year. These include inventories and expenses (p. 210 + 220), accounts receivable, payments for which are expected more than twelve months after the reporting date (p. 230) and other current assets (p. 270).
Hard-to-sell assets (A4) are funds whose turnaround time into cash is more than a year. These include non-current assets (p. 190 balance sheet).
Accordingly, the articles of the passive part of the balance are grouped by maturity dates.
The most urgent obligations (P1) are obligations, the maturity of which is up to three months. These include accounts payable (p. 620 of the balance sheet).
Fixed-term liabilities (P2) are liabilities with a maturity of three to six months. These include loans and borrowings (p. 610 of the balance sheet) and other current liabilities (p. 660).
Long-term liabilities (P3) are liabilities with a maturity of six months to a year. These include long-term liabilities (p. 590 of the balance sheet), debts to participants (founders) on the payment of income (p. 630), deferred income (p. 640) and reserves for future expenses (p. 650).
Stable (constant) liabilities (P4). These include capital and reserves (p. 490 of the balance sheet).
A firm is considered liquid if its current assets exceed its short-term liabilities, and the firm may be more or less liquid. A firm whose working capital consists primarily of cash and short-term receivables is generally considered more liquid than a firm whose working capital consists primarily of inventories. To verify the real degree of liquidity of the company, it is necessary to analyze the liquidity balance.
BALANCE LIQUIDITY
To determine the balance sheet liquidity, one should compare the results of the given groups by asset and liability. The balance is considered absolutely liquid, if there are ratios:
And 1\u003e P 1,; A 2\u003e P 2; A 3\u003e P 3; A 4< П 4 .
The fulfillment of the first three inequalities necessarily entails the fulfillment of the fourth inequality, so it is practically essential to compare the results of the first three groups by asset and liability. The fourth inequality is “balancing” in nature, and at the same time it has a deep economic meaning: its implementation indicates compliance with the minimum condition of financial stability - the enterprise has its own working capital.
In the case when one or several inequalities have a sign opposite to that recorded in the optimal variant, the liquidity of the balance sheet is more or less different from the absolute one. At the same time, the shortage of funds for one group of assets is compensated for by their excess in another group, although compensation in this case takes place only in terms of value, since in a real payment situation less liquid assets cannot replace more liquid ones.
Comparison of the most liquid assets and quickly sold assets with the most urgent liabilities and short-term liabilities allows to find out the current liquidity. A comparison of slow-moving assets with long-term and medium-term liabilities reflects prospective liquidity. Current liquidity indicates the solvency (or insolvency) of the enterprise for the closest time to the moment in question.
Prospective liquidity is a solvency forecast based on a comparison of future receipts and payments (of which, of course, only a part is represented in the respective asset and liability groups, therefore the forecast is rather rough).
The analysis of the balance sheet liquidity carried out according to the above scheme is approximate for the reason that the correspondence between the degree of liquidity of assets and the maturity of liabilities in the liability is outlined tentatively. This is due to the limited information available to the analyst conducting an external analysis based on financial statements. Therefore, to refine the analysis results, special methods are required that correct the indicators of the presented methodology. In the 1920s, the method of discount standards was used in analytical practice. Using the discount standards, the balance sheet amounts were redistributed between groups of assets and liabilities in accordance with the average statistical estimates of asset liquidity and maturity dates.
Comparison of the results of the first group by asset and liability, i.e., A 1 and P 1; (terms up to 3 months), reflects the ratio of current payments and receipts.
Comparison of the results of the second group of assets and liabilities, that is, A 2 and P 2 (terms from 3 to 6 months), shows a tendency to increase or decrease current liquidity in the near future. Comparison of the results of the asset and liability for the third and fourth groups reflects the ratio of payments and receipts in the relatively distant future. The analysis carried out according to this scheme quite fully represents the financial condition from the point of view of the possibility of timely settlements. The form of the aggregated analytical liquidity balance is presented in the table
The form of the aggregated analytical balance sheet is presented in the table “Aggregated analytical balance sheet”
Aggregated Analytical Balance |
|||||||
Assets |
For the beginning of the year |
At the end of the year |
Passive |
For the beginning of the year |
At the end of the year |
Surplus (lack) |
|
for the beginning of the year |
at the end of the year |
||||||
The most liquid assets (A1) |
The most urgent obligations (P1) | ||||||
Fast-selling assets (A2) |
Urgent Liabilities (P2) | ||||||
Slow Selling Assets (A3) |
Long-term liabilities (P3) | ||||||
Total current liquid assets |
108 492 |
100 825 |
Total payments |
198 974 |
322 869 | ||
Impossible assets (A4) |
Stable liabilities (P4) | ||||||
Balance |
697 245 |
892 493 |
Balance |
892 493 |
A 1< П 1 , А 2 > P 2, A 3< П 3 , А 4 > P 4.
Based on the data given in the table “Aggregated analytical balance”, we can conclude:
the organization is insolvent on the most urgent (current) payments, the maturity of which is up to three months;
solvent in the short term from three to six months, as it will be able to repay its short-term obligations;
insolvent in the distant future from six months to a year.
The last inequality indicates that the organization is financially unstable. In other words, own sources of inventory formation in critical situations may not be enough and the organization will be forced to use borrowed funds.
In order to assess the organization’s solvency level, in this case, it is necessary to check if the most liquid, quick-selling and slow-selling assets are enough to pay off the most urgent and short-term obligations.
The analysis of the table “Aggregated analytical balance” shows that the analyzed RUES does not have enough assets to cover payments (A1 + A2 + A3\u003e P1 + P2): 108 492< 198 974 на начало года; 100 825 < 322 869 на конец года. Кроме того, существенно не хватает и средств для покрытия наиболее срочных платежей.
Comparison of liquid assets and liabilities allows you to calculate the following indicators.
1 Total liquidity ratio (L to ). Gives an overall comprehensive assessment of the liquidity balance and solvency of the organization. It shows which part of all fixed-term liabilities, half of short-term liabilities and one third of long-term liabilities an organization can repay at the expense of all the most liquid assets, half of quick-selling assets and one third of slow-moving assets. Calculated by the formula
The value of this indicator with an absolute level of solvency should be greater than or equal to one (L to ≥ 1).
2 Absolute liquidity ratio (L and ). Shows which part of the most urgent and short-term debt the organization can repay in the near future at the expense of cash. It characterizes the solvency of the organization at the balance sheet date. It is defined as the ratio of cash and short-term securities to the most urgent and short-term obligations.
The valid value is from 0.2 to 0.7 (L a \u003d 0.2 ÷ 0.7).
This indicator is widely used by suppliers of material resources to assess the solvency of the organization.
3 quick ratio or so-called critical assessment, or intermediate liquidity (L to). It shows how much of the organization’s short-term liabilities can be repaid at the expense of funds in various accounts, in short-term securities, as well as receipts from settlements with consumers and customers. It characterizes the expected payment capabilities of the organization for a period equal to the average duration of one turn of short-term receivables, subject to timely settlements with debtors. It is calculated as the ratio of cash and short-term securities, as well as the amount of funds raised in settlements with debtors to the most urgent and short-term obligations.
The normative value is equal to one and higher (L to ≥ 1). Low values \u200b\u200bindicate the need for constant work with debtors to ensure that the most liquid part of the current assets is converted in cash for settlements with its suppliers.
This indicator is widely used by shareholders to assess the solvency of an organization.
4 current ratio or total coverage ratio (L t). Shows how much of the current loan and settlement obligations can be repaid by mobilizing all current assets. It characterizes the sufficiency of working capital of the organization, which can be used by it to pay off its most urgent and short-term obligations. In general, this ratio shows the organization’s payment capabilities, assessed under the condition of not only timely settlements with debtors and favorable sales of finished products, but also sales of other elements of tangible working capital if necessary. It is defined as the ratio of current assets (current assets) to current liabilities (short-term liabilities).
The normative value of the current ratio is equal to two (L t \u003d 2). The lower limit of the current ratio is equal to one. The lower limit is due to the fact that working capital should be enough to cover its short-term obligations. The excess of working capital over short-term liabilities by more than two times is also considered undesirable, since it indicates the organization’s irrational investment of its funds and their inefficient use.
The current liquidity ratio is the main indicator of solvency, which is used not only by external, but also mainly internal users of economic analysis. It determines the expected solvency of the organization for a period equal to the average duration of one revolution of all current assets.
5 Liquidity ratio for fundraising, i.e. mobile liquidity ratio (L ml). It shows which part of the most urgent and short-term obligations the organization can repay by realizing inventory items. It characterizes the degree of dependence of the organization’s solvency on inventories and costs in terms of the need to mobilize funds to pay off its most urgent and short-term obligations. It is determined by the ratio of inventories and costs, as well as long-term receivables to the sum of the most urgent and short-term liabilities.
The standard value of the coefficient of mobile liquidity is in the range from 0.5 to 0.7 (K ml \u003d 0.5 ÷ 0.7).
The coefficient of mobile liquidity characterizes the solvency of the organization in the long term.
6 Maneuverability coefficient of functioning capital (L m ). Shows how much of the functioning capital is immobilized in inventories and long-term receivables. It is determined by the ratio of inventories and costs, as well as long-term receivables to the difference between current assets and the most urgent and short-term liabilities.
A decrease in the value of this indicator in dynamics indicates an increase in the maneuverability of functioning capital and is a positive fact.
7 The share of current assets in assets (d that ). Shows the proportion of current assets in total assets. It is determined by the ratio of current assets in the property of the organization.
, (8.11) where WB is the balance sheet currency, thousand rubles.
The absolute value of this indicator depends on the industry sector of the organization. It is advisable to study this indicator in comparison with the indicator characterizing the share of short-term liabilities in the total capital. A decrease in the level of this indicator in dynamics with an increase in the share of short-term liabilities indicates a deterioration in the solvency of the organization.
The calculation of these coefficients is necessary not only for a comprehensive description of the organization’s solvency, but also for various external users of analytical information. So, for suppliers of raw materials, the current liquidity ratio is most interesting. A bank lending to this organization pays great attention to the critical liquidity ratio. Buyers and holders of shares and bonds of the enterprise to a greater extent assess the solvency of the organization on the basis of current liquidity ratio. Organizations providing long-term loans are more interested in liquidity ratios that characterize prospective solvency. Organizations that provide short-term loans and replenishment loans are more interested in liquidity ratios that characterize current or urgent solvency.
These ratios reflect a certain side of the organization’s solvency and are only indicative indicators of the organization’s financial position. However, with their help, you can identify the main factors affecting the solvency of the organization, and determine the main directions for its improvement.
The calculated ratios are summarized in the analytical table of the table form the table "Liquidity ratios of the enterprise"
In the course of research, first of all, the absolute level of these indicators is evaluated at the beginning and at the end of the year. For this, the actual values \u200b\u200bof the coefficients are compared with standard values \u200b\u200band with each other. The positive aspects and disadvantages of various elements of the organization’s solvency are identified.
Company liquidity ratios
in units of
The name of indicators |
Normative value |
For the beginning of the year |
At the end of the year |
Change, ± |
1 Total liquidity ratio | ||||
2 Absolute liquidity ratio |
0.2 ÷ 0.7 | |||
3 Intermediate liquidity ratio | ||||
4 current ratio | ||||
5 Mobile liquidity ratio |
0.5 ÷ 0.7 | |||
6 Maneuverability coefficient of functioning capital | ||||
7 The share of working capital in assets | ||||
8 Share of current liabilities in equity |
The data in the table “Liquidity ratios of the enterprise” show that, in general, the solvency of the organization is unsatisfactory. The total liquidity ratio is below the normative level and by the end of the year decreased to 0.45 (with normative more than 1).
The absolute liquidity ratio is within the normal range. This means that at the time of reporting, the organization can repay its short-term obligations.
Mutual settlements with suppliers and contractors are deteriorating - this is evidenced by a decrease in the ratio of intermediate liquidity. This means that in the near future, the organization will reduce its solvency.
The current ratio by the end of the year decreased by 0.32 and amounts to 4.22. This means that in the long run, the organization’s solvency remains.
The share of short-term liabilities in the capital is 36%, or for each ruble of short-term liabilities there is only 0.36 rubles. reserves that, after sale, can be used to pay current liabilities. General conclusion: the solvency of the enterprise is low, the company is close to insolvency.
9.7.1. Solvency assessment based on enterprise liquidity indicators
One of the indicators characterizing the financial position of the Company is its solvency, i.e. the ability to timely repay their payment obligations in cash.
Assessment of solvency on the balance sheet is based on the characteristics of the liquidity of current assets, which is determined by the time necessary to turn them into cash. The less time it takes to collect a given asset, the higher its liquidity. The balance sheet liquidity is the ability of a business entity to convert assets into cash and pay off their payment obligations, or rather, this is the degree to which the debt obligations of the enterprise are covered by its assets, the period of which is converted into cash corresponds to the maturity of payment obligations. It depends on the degree to which the amount of available means of payment corresponds to the amount of short-term debt obligations.
The liquidity of an enterprise is a more general concept than the liquidity of a balance sheet. The liquidity of the balance involves the search for means of payment only at the expense of internal sources (sale of assets). But the company can attract borrowed funds from the outside, if it has the appropriate image in the business world and a sufficiently high level of investment attractiveness.
The concepts of solvency and liquidity are very close, but the second is more capacious. Solvency depends on the degree of liquidity of the balance sheet and the enterprise. At the same time, liquidity characterizes both the current state of settlements and the future. The company may be solvent at the reporting date, but at the same time have adverse opportunities in the future, and vice versa.
In the economic literature, the concepts of liquidity of total assets are distinguished as the possibility of their quick realization in the event of bankruptcy and self-liquidation of an enterprise and the liquidity of current assets, ensuring its current solvency.
In fig. 9.10 is a block diagram showing the relationship between solvency, enterprise liquidity and balance liquidity, which can be compared with a multi-story building in which all floors are equal, but the second floor cannot be built without the first, and the third without the first and second; if the first floor collapses, then everyone else too. Consequently, the balance sheet liquidity is the basis (foundation) of the solvency and liquidity of the enterprise. In other words, liquidity is a way to maintain solvency. But at the same time, if an enterprise has a high image and is constantly solvent, it is easier for it to maintain its liquidity.
The balance sheet liquidity analysis consists in comparing assets by asset grouped by the degree of diminishing liquidity (table. 9.28), with short-term liabilities by liabilities, which are grouped by the degree of maturity of their repayment
The first group (A1) It includes completely liquid assets, such as cash and short-term investments.
The second group (A2) - These are quickly realized assets: finished products, goods shipped and receivables. The liquidity of this group of current assets depends on the timeliness of the shipment of products, the execution of bank documents, the speed of payment documents in banks, the demand for products, its competitiveness, solvency of customers, payment methods, etc.
Third group (Az) - these are slow-moving assets (inventories, work in progress, deferred expenses). A much longer period will be needed to turn them into finished products, and then into cash.
Fourth group (A4) - these are difficult to sell assets: fixed assets, intangible assets, long-term financial investments, construction in progress.
Accordingly, the obligations of the enterprise are divided into four groups:
P 1 - the most urgent obligations that must be repaid within a month (accounts payable and bank loans, repayment terms of which have come, overdue payments);
P 2 - medium-term liabilities with a maturity of up to one year (short-term bank loans);
P 3 - long-term bank loans and loans;
P 4 - own (stock) capital, which is constantly at the disposal of the enterprise.
The balance is considered absolutely liquid if:
- A 1 ≥ P 1; A 2 ≥ P 2; A 3 ≥ P 3; A 4 ≤ P 4.
A study of the ratios of these groups of assets and liabilities over several periods will establish trends in the structure of the balance sheet and its liquidity.
Along with absolute indicators for assessing liquidity and solvency, enterprises calculate relative indicators: absolute liquidity ratio, quick ratio, and current ratio (table. 9.29).
These indicators are of interest not only for the management of the enterprise, but also for external subjects of analysis: the absolute liquidity ratio is for suppliers of raw materials, the quick ratio is for banks, the current ratio is for investors.
The absolute liquidity ratio (cash reserve ratio) is determined by the ratio of cash and short-term financial investments to the total amount of short-term debt of the enterprise. It shows how much of short-term liabilities can be repaid due to available cash. The higher its value, the greater the guarantee of debt repayment. However, even with its small value, an enterprise can always be solvent if it can balance and synchronize the inflow and outflow of funds in terms of volume and timing. Therefore, there are no general standards and recommendations for the level of this indicator. The presence or absence of past due obligations, their frequency and duration complement the overall picture of the solvency of the enterprise.
Quick (urgent) liquidity ratio is the ratio of the aggregate of cash, short-term financial investments and short-term receivables, payments for which are expected within 12 months after the reporting date, to the amount of short-term financial liabilities. Usually satisfies a ratio of 0.7-1. However, it may turn out to be insufficient if a large share of liquid funds is accounts receivable, part of which is difficult to collect in a timely manner. In such cases, a larger ratio is required. If cash assets and their equivalents (securities) occupy a significant share in current assets, then this ratio may be less. In our example, at the beginning of the year, the ratio is 0.9 (7600/8500), and at the end - 0, 72 (12 600/17 400), however, the bulk of its composition is occupied by a group of completely liquid assets.
Current liquidity ratio (total debt coverage ratio Ktl) - the ratio of the total amount of current assets, including stocks, to the total amount of short-term liabilities; it shows the degree of coverage of current assets of current liabilities:
The excess of current assets over short-term financial liabilities provides a reserve reserve to compensate for losses that an enterprise may incur during the placement and liquidation of all current assets, except cash. The larger this stock, the greater the confidence of creditors that the debts will be paid off. Usually, the coefficient satisfies\u003e 2. In our example, its value at the beginning of the year is 1.74 (14 800/8500), at the end it is 1.53 (26 700/17 400), which is much lower than the standard level, and there is a tendency towards it downgrade.
In the Republic of Belarus, its minimum level is established: for industrial enterprises - 1.7, agricultural enterprises - 1.5, construction companies - 1.2, transport - 1.3, trade - 1.0, etc. If its actual value is below this level, then this is one of the grounds for declaring the company insolvent.
If the current liquidity ratio and the share of working capital in the formation of current assets is less than the norm, but there has been a tendency to increase these indicators, then the solvency recovery ratio (Kvp) for a period of six months is determined:
where K tl1 and K tl0 - respectively, the actual value of the liquidity ratio at the end and beginning of the reporting period;
K TLnorm - the normative value of the current liquidity ratio;
6 - the period of restoration of solvency, months;
T - reporting period, months
If K VP\u003e 1, then the company has a real opportunity to restore its solvency, and vice versa, if K VP< 1, у предприятия нет реальной возможности восстановить свою платежеспособность в ближайшее время.
If the actual level of K tl is equal to the standard value at the end of the period or above it, but there has been a tendency to decrease it, the solvency loss coefficient (K up) for a period of three months is calculated:
When considering liquidity indicators, it should be borne in mind that their value is rather conditional, since the liquidity of assets and the urgency of liabilities on the balance sheet can be determined quite approximately. So, the liquidity of stocks depends on their quality (turnover, share of scarce, stale materials and finished products). The liquidity of receivables also depends on the speed of its turnover, the share of overdue payments and unrealistic for collection. Therefore, a radical increase in the accuracy of liquidity assessment is achieved in the course of internal analysis on the basis of analytical accounting data.
A deterioration in the liquidity of assets is evidenced by an increase in the share of illiquid stocks, past due receivables, past due bills, etc.
The balance is considered absolutely liquid if:
And 1 ³ P 1, then the most liquid assets are equal to the most urgent obligations or overlap them;
And 2 ³ P 2, then quick-selling assets are equal to short-term liabilities or overlap them;
And 3 ³ P 3, then slowly realizable assets are equal to long-term liabilities or overlap them;
And 4 £ P 4, then constant liabilities equal hard assets or overlap them.
Simultaneous observance of the first three rules necessarily entails the achievement of the fourth, because if the aggregate of the first three groups of assets is greater than (or equal to) the sum of the first three groups of liabilities of the balance sheet (ie [А 1 + А 2 + А 3] ³ [П 1 + П 2 + П 3]), then the fourth group of liabilities will necessarily overlap (or will be equal to) the fourth group of assets (i.e. А 4 £ П 4). The latter provision has a deep economic meaning: when constant liabilities overlap difficult to sell assets, an important solvency condition is met - the enterprise has its own working capital, which ensures an uninterrupted reproduction process; the equality of constant liabilities and hard-to-sell assets reflects the lower limit of solvency at the expense of the company's own funds.
Important criteria characterizing the financial condition of the enterprise, as already mentioned, are its profitability and creditworthiness.
The creditworthiness of an enterprise is understood as its ability to obtain a loan and the ability to repay it on time at the expense of its own funds and other financial resources.
To achieve and maintain the financial stability of the enterprise, not only the absolute value of the profit is important, but also its level relative to the invested capital or costs of the enterprise, i.e. profitability (profitability).
The financial condition of the enterprise depends on many factors that can be classified as dependent (internal) and independent (external) on the activities of the enterprise itself.
The internal factors include, first of all, the ability of enterprise managers and its managers to effectively manage the enterprise in order to achieve the rational use of all resources, the release of competitive products and, on this basis, the stable financial condition of the enterprise.
External factors depend mainly on the state’s economic policy: financial, credit, tax, depreciation, protectionist and foreign economic, which ultimately creates favorable or poor economic conditions.
The highest form of enterprise sustainability is its ability to develop in a changing internal and external environment.
The financial condition is characterized by many indicators, which, based on their purpose, can be combined into the following groups.
I. Solvency ratios:
Absolute liquidity ratio;
Intermediate coverage ratio;
Overall coverage ratio.
II. Indicators of financial stability:
Coefficient of ownership (independence);
Share of borrowed funds;
The ratio of borrowed and own funds.
III. Indicators of business activity:
Total turnover ratio;
Rate of turnover;
Turnover of equity.
IV. Profitability ratios:
Property of the enterprise;
Own funds;
Production assets;
Long-term and short-term financial investments;
Own and long-term borrowed funds;
The rate of retained earnings;
Net rate of return.
The initial data for calculating the indicators of all these groups are mainly the data of the enterprise balance sheet and form No. 2.
Analysis of the financial condition of the enterprise is necessary not only to know what position the company is in for a particular period of time, but also for effective management in order to ensure the financial stability of the enterprise.
Let us dwell in more detail on the nature and methodology of calculating the above indicators.
Methodology for calculating solvency ratios. In general, solvency indicators characterize the ability of an enterprise at a particular point in time to settle short-term payments with creditors with its own funds.
An enterprise is considered solvent if these indicators do not go beyond the following limits:
Absolute liquidity ratio - 0.2 - 0.25;
Intermediate coverage ratio - 0.7 - 0.8;
The total coverage ratio is 2.0 - 2.5.
Indicators of financial stability characterize the degree of protection of attracted capital. These indicators, like the previous ones, are calculated on the basis of the balance sheet of the enterprise.
In countries with developed market economies, the following limits are set:
coefficient of ownership (independence) not lower than 0.7;
leverage ratio not higher than 0.3;
the ratio of borrowed and own funds is not higher than 1.
Indicators business activity calculated as follows:
There are a number of other indicators characterizing the business activity of the enterprise. Indicators of business activity must be clearly presented in the coefficients. In countries with developed market economies, the most important indicators of business activity are set standards for the economy as a whole and for industries. As a rule, such standards reflect the average actual values \u200b\u200bof these coefficients. So, in most civilized market countries, the norm for inventory turnover is 3 turnover, i.e. approximately 122 days, with a receivables turnover ratio of 4.9, or approximately 73 days.
It should be noted that the average value of assets and liabilities for a period, for example a year, is calculated as the average chronological according to monthly data; if this is not possible, then according to quarterly data; if the financial analyst has only an annual balance sheet at his disposal, then a simplified method is used: the average of the sums of data at the beginning and end of the period (year).
Indicators profitability assessments defined as follows:
In foreign practice, this indicator is called profit margin (commercial margin). Its economic meaning is the reflection of the share of net profit in each ruble of turnover.
findings
In modern conditions, the correct determination of the real financial condition of the enterprise is of great importance not only for the enterprise itself, its shareholders, but also for potential investors.
Systematic monitoring of the financial condition of the enterprise allows you to quickly identify negative aspects in the work of the enterprise and timely take effective measures to get out of this situation. Therefore, the analysis of the financial condition of the enterprise should be given the closest attention.
Balance sheet liquidity - this is the degree of coverage of liabilities of the enterprise with assets, the period of transformation of which in cash corresponds to the maturity of obligations. The solvency of the enterprise depends on the degree of liquidity of the balance sheet. The main sign of liquidity is the formal excess of the value of current assets over short-term liabilities. And the greater this excess, the more favorable the financial condition of the enterprise from the position of liquidity.
The relevance of determining liquidity balance is of particular importance in the conditions of economic instability, as well as in the liquidation of the enterprise due to bankruptcy. This raises the question: does the enterprise have enough funds to cover its debts. The same problem arises when it is necessary to determine whether an enterprise has sufficient funds to settle accounts with creditors, i.e. ability to liquidate (repay) debt with available funds. In this case, speaking of liquidity, we mean the presence of working capital in the enterprise in the amount theoretically sufficient to pay off short-term liabilities.
To conduct an analysis of the liquidity of the balance sheet of an enterprise, assets are grouped according to the degree of liquidity - from the most quickly converted into money to the least. Liabilities are grouped by the urgency of payment of obligations. A typical grouping is presented in the table below:
Table. Grouping assets and liabilities of the balance sheet to conduct a liquidity analysis
Assets | Liabilities | ||||||
Group name | Designation | Structure | Group name | Designation | Structure | ||
Balance until 2011 | Balance since 2011 | Balance until 2011 | Balance since 2011 | ||||
Most liquid assets | A1 | p. 260 + 250 | p. 1250 + 1240 | The most urgent obligations | P1 | p. 620 + 630 | p. 1520 |
Fast-selling assets | A2 | p. 240 + 270 | p. 1230 | Short-term liabilities | P2 | p. 610 + 650 + 660 | p. 1510 + 1540 + 1550 |
Slow-moving assets | A3 | p. 210 + 220 - 216 | p. 1210 + 1220 + 1260 - 12605 | Long-term liabilities | P3 | p. 590 | p. 1400 |
Difficult assets | A4 | p. 190 + 230 | p. 1100 | Permanent Liabilities | P4 | p. 490 + 640 - 216 | p. 1300 + 1530 - 12605 |
Total assets | VA | Total liabilities | BP |
HELL. Sheremet indicates the need: deduct expenses not covered by funds of funds and earmarked financing, and the amount of settlements with employees on the loans received by them. Expenses not covered by funds of funds and earmarked financing, as well as the excess of settlements with employees on loans received by them over the amount of bank loans due to the issuance of loans to employees at the expense of special funds of the organization, is reduced by subtracting immobilization from the amount of sources of own funds. If, during an internal analysis, immobilization of other debtors and other assets is detected by articles, the total of quickly sold assets also decreases by its value. (A.D. Sheremet. A comprehensive analysis of economic activity - M .: "Infra - M", 2009).
To assess the balance sheet liquidity taking into account the time factor, it is necessary to compare each asset group with the corresponding liability group.
1) If the inequality A1\u003e P1 is feasible, then this indicates the solvency of the organization at the time of the balance sheet. The organization has enough to cover the most urgent obligations of the absolutely and most liquid assets.
2) If the inequality A2\u003e P2 is feasible, then quickly realized assets exceed short-term liabilities and the organization may be solvent in the near future, taking into account timely settlements with creditors, receiving funds from the sale of products on credit.
3) If inequality A3\u003e P3 is feasible, then in the future, with timely receipt of cash from sales and payments, the organization may be solvent for a period equal to the average duration of one turnover of working capital after the balance sheet date.
The fulfillment of the first three conditions automatically leads to the fulfillment of the condition: A4<=П4
The fulfillment of this condition indicates compliance with the minimum conditions for the financial stability of the organization, the availability of its own working capital.
On the basis of a comparison of groups of assets with the corresponding groups of liabilities, a judgment is made on the liquidity of the balance sheet of the enterprise
Comparison of liquid assets and liabilities allows you to calculate the following indicators:
- current liquidity, which indicates the solvency (+) or insolvency (-) of the organization for the nearest time to the considered time period: A1 + A2 \u003d\u003e P1 + P2; A4<=П4
- prospective liquidity is a solvency forecast based on a comparison of future receipts and payments: A3\u003e \u003d P3; A4<=П4
- insufficient level of prospective liquidity: A4<=П4
- the balance is not liquid: A4 \u003d\u003e P4
However, it should be noted that the analysis of the balance sheet liquidity carried out according to the above scheme is approximate, the analysis of solvency using financial ratios is more detailed.
1. Current ratio shows whether the enterprise has sufficient funds that can be used by it to repay its short-term obligations during the year. This is the main indicator of the solvency of the enterprise. The current ratio is determined by the formula:
K \u003d (A1 + A2 + A3) / (P1 + P2)
In world practice, the value of this coefficient should be in the range of 1-2. Naturally, there are circumstances in which the value of this indicator may be greater, however, if the current liquidity ratio is more than 2-3, this usually indicates the irrational use of the company's funds. The value of the current liquidity ratio below unity indicates the insolvency of the enterprise.
2. The quick ratio, or the coefficient of "critical assessment", shows how liquid assets of the enterprise cover its short-term debt. Quick ratio is determined by the formula:
K \u003d (A1 + A2) / (P1 + P2)
The liquid assets of the enterprise include all current assets of the enterprise, with the exception of inventory. This indicator determines what proportion of accounts payable can be repaid at the expense of the most liquid assets, that is, it shows how much of the company's short-term liabilities can be immediately repaid at the expense of funds in various accounts, in short-term securities, as well as income from settlements. The recommended value of this indicator is from 0.7-0.8 to 1.5.
3. Absolute liquidity ratio shows how much of the payables the company can pay off immediately. The absolute liquidity ratio is calculated by the formula:
K \u003d A1 / (P1 + P2)
It shows how much of the short-term obligations can be immediately repaid at the expense of funds in various accounts, in short-term securities, as well as receipts from settlements with debtors. The value of this indicator should not fall below 0.2.
4. For a comprehensive assessment of the liquidity of the balance sheet as a whole, it is recommended to use general indicator of liquidity of the balance sheet, which shows the ratio of the sum of all liquid assets of the enterprise to the sum of all payment obligations (short-term, long-term, medium-term), provided that various groups of liquid funds and payment obligations are included in the indicated amounts with certain weight ratios, taking into account their significance in terms of the timing of receipt of funds and repayment of obligations. The total liquidity balance sheet is determined by the formula:
K \u003d (A1 + 0.5 * A2 + 0.3 * A3) / (P1 + 0.5 * P2 + 0.3 * P3)
Assesses changes in the financial situation of a company in terms of liquidity. This indicator is used when choosing a reliable partner from many potential partners based on financial statements. The value of this coefficient must be greater than or equal to 1.
5. Equity Ratio shows how much own working capital the company needs for its financial stability. It is determined by:
K \u003d (P4 - A4) / (A1 + A2 + A3)
The value of this coefficient should be greater than or equal to 0.1.
6. The coefficient of flexibility of functional capital shows how much of the functioning capital is held in stocks. If this indicator decreases, then this is a positive fact. It is determined from the ratio:
K \u003d A3 / [(A1 + A2 + A3) - (P1 + P2)]
During the analysis of the balance sheet liquidity, each of the considered liquidity ratios is calculated at the beginning and end of the reporting period. If the actual value of the coefficient does not correspond to the normal limit, then it can be estimated by the dynamics (increase or decrease of the value). It should be noted that in most cases, achieving high liquidity is contrary to ensuring higher profitability. The most rational policy is to ensure the optimal combination of liquidity and profitability of the enterprise.
Along with the above indicators, indicators based on cash flows can be used to assess liquidity: net cash flow (NCF - Net Cash Flow); cash flow from operating activities (CFO - Cash Flow from Operations); cash flow from operating activities adjusted for changes in working capital (OCF - Operating Cash Flow); cash flow from operating activities, adjusted for changes in working capital and meeting the need for investments (OCFI - Operating Cash Flow after Investments); free cash flow (FCF - Free Cash Flow).
At the same time, regardless of the stage of the life cycle at which the enterprise is located, management is forced to solve the problem of determining the optimal liquidity level, since, on the one hand, insufficient liquidity of assets can lead to both insolvency and possible bankruptcy, and, on the other hand, excess liquidity may result in reduced profitability. In view of this, modern practice requires the appearance of more and more advanced procedures for analyzing and diagnosing liquidity.