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 organization’s activity and allow to determine the benefits of its actions. It is these data that give a detailed picture of the state of things in the company.
The financial condition (position) of the enterprise depends primarily on the ratio of
borrowed capital to equity. In this regard, determine:
- coefficient (level) of financial autonomy - at the same time calculate the share of equity in the total amount of funds of the organization;
- coefficient (level) of financial dependence - here we are talking about how much of the total amount of cash held by the company is attracted (borrowed) capital. The indicator can be calculated in the context of time frames. That is, it is permissible and possible to determine this index based on the long-term or short-term borrowed funds;
- the level (coefficient) of financial risk, also known as the shoulder of financial leverage - here we consider the ratio of borrowed funds to equity. Moreover, there is another name for this index - the coefficient of financial activity.
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 unity.
To determine the profitability of attracting cash and capital from the side, another indicator is used - this is the effect of financial leverage. This index shows how much the return on equity 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 words, these data show how likely the company is to repay its short-term debts.
Solvency assessment is carried out on the basis of data on the liquidity of its current assets - the ability to repay loan and debt obligations using company assets.
Moreover, the following financial ratios are used for analysis:
- current liquidity - it is also called a measure of coverage. It characterizes the organization’s ability to repay short-term loan liabilities with its own available current assets;
- intermediate (quick) liquidity - shows how much it is possible to repay liabilities with its fixed assets (funds held in the organization’s operational accounts, stocks in warehouses, short-term debt of debtors);
- absolute liquidity - the final value of this indicator describes how likely it is to pay short-term loan loans at the expense of funds placed on the settlement accounts of the company and other financial investments placed for a short period.
These financial ratios are the most important when calculating the solvency and financial position (condition) of an enterprise.