Coefficient analysis is part of the financial analysis, which acts as a system of advanced source analysis of financial reporting. The objective of this analysis is to provide information on economic operations, the functioning of the enterprise and, above all, its financial condition. This information is used by management in the process of managing the business environment: creditors, contractors, investors, auditors, etc. The methodology for conducting a coefficient analysis of the financial condition of an enterprise has its own characteristics, steps for each block of ratios.
Essence of analysis
The coefficient analysis method is a kind of quantitative research and is based on indicators representing the relationship of specific financial values that are important in terms of their relationships. The choice of indicators that can be calculated for financial companies is very wide. However, the calculation of an excessive number of indicators of the coefficient analysis of the financial condition of the company can confuse the analysis. Therefore, countries with market economies usually use a limited set of the most effective indicators to characterize the versatile aspects of the company.
The coefficient analysis method is performed on the basis of the source documents of the financial statements of the company, taking into account, in particular, the economic values included in the balance sheet and financial results. When calculating the coefficients, it is important to take into account the significant difference between the balance sheet, which illustrates the financial condition of the organization at the date of preparation, and the report on financial results, which is data for the period preceding the balance sheet date. When constructing the indicators of the coefficient analysis, consisting of the amounts coming from both of these documents, the value of the profit and loss should be taken into account. The arithmetic average of the values of the balance sheet indicators is also taken into account.
Certain values of indicators when applying the coefficient method of financial analysis are estimated by equating with established standards. These standards are expressed in ranges of values or boundary values. The technique of their horizontal analysis is applied, in which the change in indicators is evaluated in subsequent periods, that is, the trends of these changes are analyzed. The interpretation of the balance sheet coefficient analysis also uses the assessment of the obtained values against the background of the industry in which the company operates.
This is especially important due to the fact that the norms of indicators adopted in the literature are calculated for all enterprises operating in various industries, trade, and agriculture in different countries. When conducting a coefficient analysis, one should take into account the possibility of incomparability of the obtained values, due either to changes in macroeconomic conditions in the economy or to differences in the construction of individual indicators.
The name of the areas of analysis of indicators used in the literature in which analytical indicators are classified is not uniform.
Cash flow analysis using ratios
To conduct a coefficient analysis of an enterprise, the following cash flow research ratios are used:
K1 = ( + ) / ,
where DSN - funds to start;
- means which arrived;
DS- means that have been used up.
This ratio determines the fact whether the company is able to provide payments of money for a certain period of time when using the balance of accounts at the bank, at the cash desk or inflows for the period.
The optimal value of the coefficient during the coefficient analysis of cash flows is 1.
K2 = DSp / DSi,
where DSP means which arrived;
DS- means that have been used up.
The coefficient means that the company has its own funds to pay off debts (or, conversely, are not available). The standard is also equal to 1.
And = (DS + KFV-DZ) / Rds,
where KFV - short-term financial investments, average values for the period;
DZ - the average value of receivables for the period;
DS - cash;
RDS - average daily cash flow.
When conducting a coefficient analysis of cash flows, this ratio shows whether the company has the ability to carry out its activities without interruption using the cash resources received for the sale of products.
Kb = (PP + Am) / (DO + KO),
where CHP - the amount of net profit;
Am- the amount of depreciation;
To - long-term obligations;
KO - short-term obligations.
This ratio characterizes the solvency of the company. It can be calculated by cash flow. The standard is in the range from 0.4 to 0.45.
- cash sufficiency indicator:
Cd = DS / OD,
where DS - cash on a date;
OP- obligations to repay.
The indicator indicates the current solvency of the company at the moment in question and period of time.
Kv = DS / V
It characterizes the share of cash in the company's revenue structure. With a high value of the ratio, we can say that the company is financially stable.
- cash flow adequacy indicator K1:
K1 = DPtd / (ZK + Z + D),
where DPtd is the net cash flow from current activities;
- borrowed capital;
- stocks;
D - dividends.
Determines the adequacy of the organization’s net cash flow, taking into account funded needs
- cash flow efficiency ratio K2
K2 = DPtd / DPo,
where DPO - cash outflow.
- K3 cash flow profitability indicator
K3 = PE / ChDP * 100,
where state of emergency - net profit;
NPV - net cash flow for the period
The coefficient method of analysis of cash flows allows the company to assess the effectiveness of the use of cash and finance of the company.
Liquidity research using ratios
In the coefficient analysis of liquidity, it is studied in two aspects:
- in a statistical sense: in relation to a specific point, for example, at the balance sheet date, using the main financial statements: balance sheet and report on financial results and traditional ratios;
- in dynamic terms of the coefficient financial analysis: for a certain period, based on the cash flow statement.
Thus, they carry out a study of the company's liquidity, that is, its ability to repay short-term obligations that are payable within 1 year.
- CTL current liquidity indicator:
Ctl = OA / KO,
where OA - the amount of current assets, t .;
KO - liabilities for the short term, i.e.
This indicator determines how many times the assets at the company's disposal, ways to cover their current liabilities to third parties: suppliers, employees, government agencies, etc.
The determination of the level of current assets and liabilities is possible only by the enterprise itself, since the information necessary to adjust current assets and liabilities is not presented in the financial statements. For this reason, unadjusted values of current assets and liabilities of the short-term period are reflected in the modified form of the coefficient:
(Z + DZ + DS + POA) / THAT,
where 3 - stocks;
DZ - accounts receivable;
Ds - cash;
POA - other current assets;
THAT - current liabilities
The rational value of this indicator should be in the established range. An index below 1.2 indicates a threat to a company's ability to settle its current obligations, which could directly affect the company's business operations. An index above 2.0 indicates an enterprise surplus, that is, poor management.
- Quick liquidity indicator
Kbl = (KDZ + FV + DS) / THAT,
where KDZ - short-term receivables, i.e.
FV - financial investments, i.e.
DS - cash, i.e.
TO- current liabilities, i.e.
This indicator determines how many times current assets with a high degree of liquidity at the disposal of the company cover their current liabilities to third parties. This ratio is adjusted in relation to the current liquidity ratio for the least liquid current assets - stocks and charges.
The optimal level of this ratio should be 1.0, that is, current liabilities should be fully covered by current assets with a high degree of liquidity. In the case of enterprises characterized by rapid turnover of assets (for example, trade), this standard is reduced to the level of 0.7.
A lower value of this indicator may indicate liquidity problems, while a high value of this indicator indicates unproductive cash accumulation and a high level of accounts receivable, which may have a negative impact on the company's results.
Debt analysis using ratios
When conducting a coefficient analysis of an enterprise, the ratio of debt to assets, to capital and equity in the debt meter is always in the denominator. It should be emphasized that the calculation of total capital also includes debt obligations and capital.
This analysis is closely related to the coefficient analysis of the solvency of the company.
- Leverage ratio is the ratio of the average value of assets to equity, calculated as the average value.
- Interest coverage ratio is EBIT divided by interest.
- The coefficient of coverage of basic expenses is the number of rental payments and income before interest and taxes, divided by the amount of interest and leasing fees.
Debt ratios characterize, on the one hand, the degree of debt of the enterprise, and on the other, its ability to repay liabilities.
Cob = O / A,
where O is the total amount of obligations of the company;
A - company assets.
The total debt ratio Kzk determines the share of borrowed capital in financing the assets of the company.
The accepted, permissible level of borrowed capital participation in the company's assets is within the established range. A ratio below 0.57 can be interpreted as irrational management of funding sources, while a ratio above 0.67 indicates a high risk of the company losing its ability to repay debt. In enterprises with exceptionally bad economic and financial situations, the ratio of total debt of borrowed capital exceeds 1.
Kdz = DO / SK,
where DO - long-term obligations;
SK - equity.
This ratio, also called the debt ratio, risk indicator or leverage ratio, reports the level of coverage of long-term liabilities with equity. According to the standard for this indicator, its quantity should be in the established range. If the indicator exceeds the level of 1.0, the company is considered to be in great debt.
Kdss = OO / SK,
where GS - general obligations;
SK - equity.
This indicator informs about the level of debt of the company's equity. And at the same time, on the relation of attracted capital to equity as a source of financing for the enterprise. It is assumed that the value of this indicator should not exceed 1.0 for large and medium enterprises and 3.0 for small enterprises.
- Debt coverage ratio by net financial result Kp:
Kn = ChFR / (KR + P),
where the CFR is the net financial result;
KP - capital installments;
P - percent
This ratio determines how many times the net financial result covers the servicing of principal payments and interest. In an enterprise with the right financial situation, this ratio should be greater than 1.0.
- EBIT service debt coverage ratio:
Kn = (WFR + P) / (KR + P),
where FVR - gross financial result;
P - percent;
KR - capital installments
This indicator shows how many times the profit before tax and interest covers the repayment of capital contributions and interest, i.e. the extent to which profit provides debt service. The minimum threshold is 1.2. The World Bank estimates that it should be over 1.3.
- The level of coverage of debt service from cash flow:
Y = (CFR + A) / (KR + P),
where the CFR is the net financial result;
A - depreciation;
KR - capital installments;
P - percent
This ratio determines debt service coverage through a net financial surplus. The optimal threshold is 1.5, that is, the amount of profit before tax, together with depreciation, should be at least 50% higher than the annual loan payment plus interest.
The coverage ratio of interest liabilities determines the company's ability to pay interest on time. If both interest and capital contributions must be paid at the same time, there is no need to take this indicator into account in the analysis.
The essence of financial stability
When conducting a coefficient analysis of the financial condition, financial stability is a situation in which the financial system, that is, financial intermediaries, markets and market infrastructures, is able to withstand economic shocks and sudden adjustments to financial imbalances.
Financial stability refers to the study of indicators of capital of the company and their relationship to each other.
Thanks to the coefficient analysis of financial stability, the probability of serious financial distortions in the process of financial intermediation, which can negatively affect the functioning of the real economy, is reduced.
In the criteria for market relations, financial stability is a testament to the stability of the company and its ability to survive. That is, it indicates the state of the company's resources now, the ability to freely use the finances of the company, while ensuring the creation of a product and covering costs.
The main goal of management when conducting a coefficient analysis of the financial condition is the ability to ensure the stability of a company whose activities are focused on generating income.
The financial stability of the company is a certain state of the organization, when the solvency is constant in time, and borrowed and own capital have a rational structure. As a result, stability is displayed in such a state of monetary resources that corresponds to the market and indicates the need for the development of the company.
Stability and stability is formed in the process of economic work and is the main element of the company's resilience.
The study of financial stability using ratios
The tasks of studying monetary financial stability when conducting a coefficient analysis of the finances of enterprises:
- assessment of the solvency and monetary stability of the company, identification of violations and their circumstances;
- development of tips and ways to increase the monetary stability and solvency of the company;
- effective introduction of resources and normalization of monetary stability;
- forecasting possible monetary outcomes and probable monetary stability, depending on different methods of using resources.
Among the main coefficients are the following.
- The coefficient of financial stability:
Kf = (SK + DK) / P,
where SK is the equity of the company;
DK - long-term plan obligations;
P - liabilities of the company.
The standard for this ratio is 0.8-0.9. Getting into this framework characterizes the stability of the company from a positive point of view:
- The indicator of concentration of borrowed capital is the difference between "1" and the indicator of financial stability. If the level of the company's capital is high, then it can be characterized positively in terms of stability. In this situation, investors are more willing to invest in the development of the company, as they are confident that in case of adverse factors, their investments can be returned at the expense of equity.
- The opposite indicator of autonomy is the indicator of financial dependence, which is determined by the ratio of liabilities to the amount of equity and long-term plan obligations.
- The indicator of maneuverability reflects the part of capital aimed at maintaining the current functioning of the company. , .
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This indicator determines how many times the company's sales exceed its assets. Its size depends on the specifics of the industry - it is low in the industry with high capital intensity and high in enterprises with a large share of human labor. Therefore, it is especially useful for comparing the activities of companies in one industry.
The turnover ratio of fixed assets Kos:
Kos = D / OS avg,
where OS avg is the average stock of fixed assets.
This indicator determines the level of revenue from fixed assets. Its value averages 1.6. This indicator is useful for evaluating enterprises with a high share of fixed assets in assets. In interpreting this indicator, it should be borne in mind that in the case of enterprises with old fixed assets that have already been depreciated, the value of this indicator will be overstated.
Working capital turnover ratio Cobob:
Cobob = D / OBS,
where OBs - average current assets
This coefficient determines the speed of turnover of current assets (the number of turns made by current assets per unit time). The higher it is, the better the financial condition of the enterprise.
Conclusion
Ratio analysis is a continuation of the preliminary analysis of financial statements. This analysis is based on the relationships of certain financial variables that are important in terms of their relationships.
Ratio financial analysis allows you to determine the financial position of the company by the following ratios:
- liquidity;
- solvency;
- debt
- efficiency;
- financial stability.
Certain values of the coefficient financial analysis of the enterprise by indicators are evaluated individually in the context of the enterprise environment. Such an assessment is carried out by comparing with established standards, expressed in ranges of values or boundary values, as well as by horizontal analysis, when the change in these indicators is evaluated in subsequent periods, in particular, the tendency of these changes.