The condition for the development and survival of any company is its financial independence and stability. If the company is stable, then it is able to withstand unexpected changes in market conditions. A financially independent enterprise is able to pay in due time for its obligations with partners, the state, personnel, and extrabudgetary funds.
The financial independence of the company guarantees its solvency in ordinary business conditions and in case of accidental changes in the market.
The main factors that determine the financial stability and independence of an organization are the financial structure of capital and the financing policy of some of the individual components of assets (stocks and non-current assets). The financial structure of capital depends on the ratio of borrowed and own capital, as well as its sources (long-term and short-term). Therefore, in order to assess the financial stability of the company, it will be necessary to analyze not only the structure of financial resources, determine the coefficient of financial independence, but also the direction of investment of assets.
Assessment of the level of stability is carried out using the ratio of equity to borrowing, solvency (autonomy), and maneuverability ratio of funds (equity). They also use the coefficient of financial independence, an indicator of the effectiveness of the use of own funds and the amount of use of resources of all property of the company.
The ratio of borrowed and own funds allows us to characterize the structure of the company's resources. The indicator is a quotient from dividing the total amount of borrowed funds by the amount of equity. The permissible maximum value of this indicator is equal to one, which implies an equal ratio of own and attracted assets.
Financial independence ratio : formula
This indicator is the most important in assessing the situation of the enterprise. It is calculated by the ratio of own funds to the entire volume of resources (financial). The financial independence ratio shows the degree to which the company is independent of external loans. In addition, the indicator characterizes the organization’s ability to provide its own external obligations using its own funds. With a larger coefficient, one can say about the best condition of the company, about its less dependence and greater stability. Sometimes apply the inverse coefficient of financial independence.
For analysis, they also calculate the coefficient of autonomy (concentration of their capital), which determines the share of funds that the owner has invested in the total value of his own property. It is calculated by the formula showing the ratio of equity to the main currency of the balance sheet.
The normal coefficient value is 0.5. In this situation, we can say about the security of the company with its own funds and a minimum of borrowed assets. Thus, the company can pay off its obligations by selling property formed from its own sources.
When assessing this ratio, one should take into account the industry sector of the organization, the presence of borrowed long-term assets and other factors.
The degree of mobility of the use of equity is determined using the coefficient of maneuverability. It is calculated by the ratio of current assets to equity.
Despite the fact that increasing financial independence is a positive trend, there is nothing wrong with attracting third-party capital, especially if these assets do not prevail and are inexpensive.