The long-term development of any enterprise depends on the ability of management to promptly identify emerging problems and competently neutralize them. To achieve this goal, financial analytics is used, the purpose of which is to identify all problematic elements in the company’s management tools.
What is financial analysis of an enterprise
Financial analysis should be understood as the integrated use of certain procedures and methods for an objective assessment of the state of the enterprise and its economic activities. The basis for the assessment is quantitative and qualitative accounting information. It is after its analysis that specific management decisions are made.
Financial analysis is focused on studying the economic, technical and organizational level of the enterprise, as well as the divisions related to it. The purposes of financial analysis include assessing the financial and production economic activities of a company, including diagnosing bankruptcy.
Priorities of financial analysis
Financial and economic analysis of the state of the enterprise sets specific tasks, the implementation of which determines the accuracy of the analytical result. We are talking about revealing reserves and production capabilities that were not used, assessing quality, establishing the impact of specific types of activities on overall business results, and identifying factors that caused deviations from standards. In the process of analysis, a forecast of the expected results of the enterprise's activities and the preparation of information necessary for making management decisions are also carried out.
It can be argued that financial analysis of an enterprise plays the role of financial management both in the company itself and in the process of cooperation with partners, tax authorities, and the financial and credit system. At the same time, business activity, financial stability, profitability and profitability are taken into account. The analysis itself can also be defined as a tool for management, planning, as well as monitoring the company’s activities and its diagnostics.
It is worth noting that the analysis of specific aspects of the enterprise’s activity is based on the analysis of the system of indicators, and in a dynamic state. This is explained by the fact that the financial, production and economic activities of the company, as well as its divisions, have interrelated indicators. For this reason, changes in specific indicators can affect the final financial technical and economic indicators of the enterprise.
Financial and economic analysis of the enterprise: goals
Speaking about this form of analysis of a company’s activities, it is worth noting that it involves a combination of methods of deduction and induction. In other words, while studying individual indicators, analytics must also take into account general indicators.
Another important principle is that when analyzing an enterprise, all types of business processes are studied taking into account their interdependence, interdependence and interconnection. As for the analysis of factors and causes, in this case analytics is based on an understanding of the following principle: each factor and cause must receive an objective assessment. Therefore, both causes and factors are initially studied, after which they are classified into groups: secondary, main, insignificant, essential, minor and determining.
The next stage is to study the influence of determining, main and essential factors on economic processes. But low-determining and insignificant factors are studied only if necessary and only after the main part of the analysis has been completed. It is worth considering the fact that financial analysis does not always imply the study of all factors, since this is relevant only in some cases.
At the same time, if we talk about the exact goals of the financial analysis of an enterprise, it makes sense to determine the following components of the assessment process:
- analysis of loan repayment ability;
- tracking the state of the enterprise at the time of assessment;
- bankruptcy prevention;
- assessment of the company's value during its merger or sale;
- tracking the dynamics of financial condition;
- analysis of the enterprise’s ability to finance investment projects;
- drawing up a forecast of the financial activity of the enterprise.
It is worth noting that in the process of studying the financial condition of an enterprise, those economic entities that are focused on obtaining extremely accurate and objective information about the activities of the enterprise can use the help of a financial analyst.
Such subjects can be divided into two categories:
- External: creditors, auditors, government agencies, investors.
- Internal: shareholders, audit and liquidation commission, management and founders.
Another purpose for which financial analysis can be carried out, but not at the initiative of the enterprise, is to assess the investment potential and credit capacity of the company. Such analytics, as a rule, are of interest to banks, for which it is important to ensure the solvency and profitability of the enterprise. This is logical, since any potential investor is interested in obtaining information regarding the liquidity of the company and the degree of risks regarding loss of deposit.
Features of internal and external analysis
Internal financial accounting and analysis is necessary in order to meet the needs of the enterprise itself. It can be focused both on identifying the degree of liquidity of the company and on a thorough assessment of its results within the last reporting period. Such assessment methods are relevant in the case when a financial analyst or company management intends to determine how realistic and relevant the allocation of funds for the expansion of production that was planned is, and what impact additional costs can have on it.
As for external financial analysis, it is carried out by analysts who are not related to the enterprise. They also do not have access to the company's internal information.
If an internal analysis is carried out, then there will be no problems with attracting information of any category, including that which is not accessible. In the case of external analysis, some limitations of assessment methods are initially taken into account due to the lack of complete information.
Types of financial analysis
Analytics, with the help of which the state of the enterprise is assessed, can be divided into several key types according to the content of the management process:
- retrospective or current analysis;
- promising (preliminary, forecast);
- operational financial and economic analysis;
- analysis that takes into account the results of activities over a specific period of time.
Each type is used depending on the key task.
Financial analysis methods
Current methods of financial analytics include the following areas:
- Vertical analysis. This is one of the types of assessment of the financial statements of an enterprise, in which the share of balance sheet items and various types of liabilities and assets is analyzed. With this method, the distribution of resources is shown in shares.
- Horizontal analysis. We are talking about financial analytics of a company, which involves a dynamic assessment of balance sheet items. Both the nature and direction of the trend are assessed.
- Ratio analysis. With this type, financial, economic and production indicators are calculated on the basis of financial statements. Such financial and accounting analysis also studies statements of losses, profits and other regulatory documentation. The calculation of ratios makes it possible to evaluate the effectiveness and efficiency of various resources, activities and capital of the company, among other things.
- Trend analysis. With such an assessment, each reporting item is compared with specific previous periods, as a result of which the trend of the enterprise's movement is determined. With the help of an established trend, possible values of future indicators are formed. In other words, a prospective analysis is carried out.
- Factor analysis. In this case, an assessment of the influence of specific factors on the final results of the company’s activities is used. Stochastic and deterministic techniques are used for research.
- Comparative analysis. We are talking about intra-farm analytics of summary indicators of workshops, divisions, subsidiaries, etc. Inter-farm financial analysis of the organization is also carried out in relation to the indicators of competing enterprises.
Ratio analysis as the main tool of financial analytics
Ratio can be defined as a key method of financial analysis. This is explained by the fact that a quantitative assessment of the company’s condition and the adoption of various management decisions aimed at changing specific indicators are made on the basis of financial and economic ratios. In this case, one can observe a direct connection between the company’s resources that have been taken into account and the efficiency of their operation, expressed through the values of financial and economic ratios and data in balance sheet items.
This method of financial analysis involves the assessment of four relevant groups of economic indicators:
- Profitability (profitability) ratios. Such data serves to reflect the profitability of a company's capital in generating income through the use of various types of assets.
- Financial reliability (sustainability) coefficients. In this case, the level of equity and debt capital of the company is demonstrated, and the capital structure of the company is also displayed.
- Solvency (liquidity) ratios. Reflect the capabilities and ability of the organization to timely short-term and long-term debt obligations.
- Turnover ratios (business activity). Using this information, you can determine the number of company assets for a specific reporting period and the intensity of their turnover, among other things.
The method of financial analysis, in which the coefficients of the enterprise are taken as the basis for calculations, is considered important for the reason that it makes it possible to timely identify crisis phenomena in the company and take relevant measures to stabilize the situation.
This type of analysis is part of the strategic management of the organization.
Examples of financial analytics
In order to understand the essence of assessing the state of an organization, it is necessary to study an example of financial analysis. Let’s say that over the entire period under study, the markup was stable, but a certain decrease was observed.
During the study period, an increase in the rate of turnover of goods was revealed by 35 days. This indicates the presence of illiquid stock and an increase in the quantity of goods inventories. At the same time, the optimal turnover value for hardware stores is 80-90 days.
As for accounts receivable, the company does not have any - all retail trade of the company is carried out on a payment-on-delivery basis. Accounts receivable turn over within 4-7 days, which can be defined as a positive indicator.
At the same time, the operating cycle within the period covered by the analysis also increased by 35 days. Obviously, it (the cycle) corresponds to an increase in the duration of trade turnover. Due to the increase in the period of trade turnover, the period of the financial cycle has also increased.
Financial analysis of an enterprise defines an example of this kind as a fairly stable activity in which the warehouse can be overstocked. To optimize the process as much as possible, it is necessary to review the procurement policy in order to reduce the turnover period.
How to analyze a bank's activities
Financial analysis of the bank is focused on ensuring quality management through the development of key parameters of its activities. We are talking about such indicators as the profitability of operations, capital and payment turnover, the structure of assets and liabilities, the efficiency of the bank's divisions, the risks of the portfolio of financial resources and intra-bank pricing.
In order for the study of the state of the bank to be successful, certain conditions must be met: the information used for the analysis must be reliable, accurate, timely and complete. If the data provided does not correspond to reality, the applied financial analysis methods will not lead to objective conclusions. This means that the impact of some problems will be underestimated, which may result in a worsening situation.
The reliability of information is assessed during inspections and during documentary supervision.
Methods for studying the condition of a bank
Various aspects of the bank's activities are assessed through the use of scientific and methodological tools. It is with their help that it is possible to develop an optimal solution to specific management problems.
There are popular methods of financial analysis of a bank:
- Dynamic Balance Sheet Equation. This technique involves accounting for profits and losses. Through such management, a factorial financial assessment of the bank’s condition and the fact how profitable its activities are is carried out.
- Modified balance sheet management (liabilities equal to assets). In this case, financial analysis involves a quick assessment of the effectiveness of managing the bank's liabilities.
- Basic balance sheet management (assets equal to the sum of equity and paid liabilities). The key principle of this assessment methodology is the effective management and ownership of all bank assets.
- Capital equation of the balance sheet (the bank's capital is equal to assets minus paid liabilities). This type of equation is relevant when it is necessary to obtain a final assessment of how effective the management of available capital was within the framework of increasing equity capital. This technique is also used to determine and exploit reserves of increased profitability.
Thus, we can conclude that the financial analysis of an enterprise, the example of which was given above, is a necessary measure for determining the condition and profitability of the company. Without such analytics, the efficiency of an enterprise’s activities can significantly decrease, and at the same time, rehabilitation measures may turn out to be irrelevant if they are not assessed in a timely manner.
Analysis of the financial condition of the enterprise:
Financial activity of the enterprise
Before moving directly to the topic of the article, you should understand the essence of the concept of financial activity of an enterprise.
Financial activities at the enterprise– financial planning and budgeting, financial analysis, management of financial relations and funds, determination and implementation of investment policy, organization of relations with budgets, banks, etc.
Financial activities solve such problems as:
- providing the enterprise with the necessary financial resources for financing its production and sales activities, as well as for the implementation of investment policy;
- taking advantage of promotion opportunities efficiency activities of the enterprise;
- ensuring timely repayment current and long-term liabilities;
- determination of optimal credit conditions to expand sales volume (deferment, installment plan, etc.), as well as collection of generated accounts receivable;
- traffic control and redistribution financial resources within the boundaries of the enterprise.
Feature of the analysis
Financial indicators allow you to measure the effectiveness of work in the above areas. For example, liquidity indicators allow us to determine the ability to timely repay short-term obligations, while financial stability ratios, which are the ratio of equity and debt capital, allow us to understand the ability to meet obligations in the long term. The financial stability ratios of another group, which show the adequacy of working capital, make it possible to understand the availability of financial resources to finance activities.
Indicators of profitability and business activity (turnover) show how much the company uses the available opportunities to improve operational efficiency. Analysis of receivables and payables allows us to understand credit policy. Considering that profit is formed under the influence of all factors, it can be argued that analysis of financial results and profitability analysis allows us to obtain a comprehensive assessment of the quality of the financial activity of the enterprise.
The effectiveness of financial activities can be judged from two aspects:
- Results financial activities;
- Financial condition enterprises.
The first is expressed by how effectively the company can use its existing assets, and most importantly, whether it can generate profit and to what extent. The higher the financial result for each ruble of invested resources, the better the result of financial activities. However, profitability and turnover are not the only indicators of a company's financial performance. The opposite and related category is the level of financial risk.
The current financial condition of the enterprise just means how sustainable is an economic system. If a company is able to meet its obligations in the short and long term, ensure uninterrupted production and sales processes, and also reproduce expended resources, then we can assume that, if current market conditions remain, the enterprise will continue to operate. In this case, the financial condition can be considered acceptable.
If a company is able to generate high profits in the short and long term, then we can talk about efficient financial activities.
In the process of analyzing the financial activities of an enterprise, both when analyzing financial results and in the process of assessing its condition, the following methods should be used:
- horizontal analysis - analysis speakers financial results, as well as assets and sources of their financing, will allow us to determine the general trends in the development of the enterprise. As a result, one can understand the medium and long term prospects of his work;
- vertical analysis – assessment of the formed structures assets, liabilities and financial results will help identify imbalances or ensure the stability of the company’s current performance;
- comparison method – comparison data with competitors and industry averages will allow you to determine the efficiency of the company’s financial activities. If the enterprise demonstrates higher profitability, then we can talk about high-quality work in this direction;
- coefficient method - in the case of studying the financial activities of an enterprise, this method is important, since its use will allow obtaining a total indicators, which characterize both the ability to demonstrate high results and the ability to maintain sustainability.
- factor analysis - allows you to determine the main factors that influenced the current financial position and financial performance of the company.
Analysis of the financial results of the enterprise
Investors are interested in profitability, as it allows them to evaluate the effectiveness of management and the use of capital that was provided by the latter for the purpose of making a profit. Other participants in financial relations, such as creditors, employees, suppliers and customers, are also interested in understanding the profitability of the company's activities, as this allows them to estimate how smoothly the company will operate in the market.
Therefore, profitability analysis allows us to understand how effectively management implements the company’s strategy to generate financial results. Given the large number of tools that are in the hands of the analyst when assessing profitability, it is important to use a combination of different methods and approaches in the process.
Although firms report net income, total financial results are considered more important as a measure that better measures the performance of a company's stock. There are two main alternative approaches to assessing profitability.
First approach involves consideration of various transformations of the financial result. Second approach– indicators of profitability and profitability. In the case of applying the first approach, such indicators as the return on shares of the enterprise, horizontal and vertical analysis, assessment of the growth of indicators, consideration of various financial results (gross profit, profit before tax, and others) are used. In the case of applying the second approach, the indicators of return on assets and return on equity are used, which provide for obtaining information from the balance sheet and income statement.
These two metrics can be broken down into profit margin, leverage and turnover, which provides a better understanding of how a company generates wealth for its shareholders. In addition, margins, turnover and leverage can be analyzed in more detail and broken down into different line items from the financial statements.
Analysis of financial performance indicators of the enterprise
It is worth noting that the most important method is the method of indicators, also known as the method of relative indicators. Table 1 presents groups of financial ratios that are best suited for analyzing performance.
Table 1 – Main groups of indicators that are used in the process of assessing the company’s financial results
It is worth considering each of the groups in more detail.
Turnover indicators (indicators of business activity)
Table 2 presents the most commonly used business ratios. It shows the numerator and denominator of each coefficient.
Table 2 - Turnover indicators
|
Business activity indicator (turnover) |
Numerator |
Denominator |
|
Cost price |
Average inventory value |
|
|
Number of days in period (for example, 365 days if yearly data is used) |
Inventory turnover |
|
|
Average value of accounts receivable |
||
|
Number of days in the period |
Accounts receivable turnover |
|
|
Cost price |
Average value of accounts payable |
|
|
Number of days in the period |
Accounts payable turnover |
|
|
Working capital turnover |
Average cost of working capital |
|
|
Average cost of fixed assets |
||
|
Average asset value |
Interpretation of turnover indicators
Inventory turnover and period of one inventory turnover . Inventory turnover is the basis of operations for many organizations. The indicator indicates resources (money) that are in the form of inventories. Therefore, such a ratio can be used to indicate the effectiveness of inventory management. The higher the inventory turnover ratio, the shorter the period the inventory is in the warehouse and in production. In general, inventory turnover and period of one inventory turnover should be estimated according to industry norms.
High An inventory turnover ratio compared to industry norms may indicate high efficiency in inventory management. However, it is also possible that this turnover ratio (and a low one-period turnover rate) could indicate that the company is not building adequate inventory, which could cause a shortage to hurt revenue.
To evaluate which explanation is more likely, an analyst can compare a company's earnings growth to industry growth. Slower growth coupled with higher inventory turnover may indicate insufficient inventory levels. Revenue growth at or above industry growth supports the interpretation that high turnover reflects greater inventory management efficiency.
Short The inventory turnover ratio (and correspondingly high turnover period) relative to the industry as a whole may be an indicator of the slow movement of inventory in the operational process, perhaps due to technological obsolescence or changes in fashion. Again, comparing a company's sales growth to the industry can provide insight into current trends.
Receivables turnover and period of one receivables turnover . The accounts receivable turnover period represents the time that elapses between sale and collection, which reflects how quickly a company collects cash from customers to whom it offers credit.
Although it is more correct to use credit sales in the numerator, information on credit sales is not always available to analysts. Therefore, revenue reported on the income statement is generally used as the numerator.
A relatively high accounts receivable turnover ratio may indicate high efficiency in lending to and collecting money from customers. On the other hand, a high accounts receivable turnover ratio may indicate that lending or debt collection terms are too strict, indicating a possible loss of sales to competitors who offer more lenient terms.
Relatively low Accounts receivable turnover typically raises questions about the effectiveness of credit and collection procedures. As with inventory management, comparing a company's sales growth to its industry can help the analyst evaluate whether sales are being lost due to strict credit policies.
In addition, by comparing uncollectible accounts receivable and actual loan losses with past experience and with similar companies, it is possible to assess whether low turnover reflects problems in managing commercial lending to customers. Companies sometimes provide information about accounts receivable stitching. This data can be used in conjunction with turnover rates to draw more accurate conclusions.
Accounts payable turnover and accounts payable turnover period . The accounts payable turnover period reflects the average number of days a company takes to pay its suppliers. The accounts payable turnover ratio indicates how many times a year the company covers its debts to its creditors.
For the purposes of calculating these figures, it is assumed that the company makes all of its purchases using trade credit. If the volume of goods purchased is not available to the analyst, then the cost of goods sold indicator can be used in the calculation process.
High The accounts payable turnover ratio (low turnaround time) relative to the industry may indicate that the company is not making full use of available credit funds. On the other hand, this may mean that the company uses a system of discounts for earlier payments.
Excessively low the turnover ratio may indicate problems with timely payment of debts to suppliers or the active use of soft supplier credit conditions. This is another example of when you should look at other indicators to form informed conclusions.
If liquidity ratios indicate that the company has sufficient cash and other short-term assets to pay obligations, and yet the payables turnover period is high, then this will indicate lenient credit terms of the supplier.
Working capital turnover . Working capital is defined as current assets minus current liabilities. Working capital turnover indicates how efficiently a company generates income from its working capital. For example, a working capital ratio of 4 indicates that the company generates 4 rubles of income for every 1 ruble of working capital.
A high value of the indicator indicates greater efficiency (i.e., the company generates a high level of income relative to a smaller amount of attracted working capital). For some companies, the amount of working capital may be close to zero or negative, making this indicator difficult to interpret. The following two ratios will be useful in these circumstances.
Fixed asset turnover (capital productivity) . This metric measures how efficiently a company generates returns from its capital investments. As a rule, more high the fixed asset turnover ratio shows a more efficient use of fixed assets in generating income.
Low the value may indicate that the business is inefficient, capital-intensive, or that the business is not operating at full capacity. In addition, fixed asset turnover may be influenced by other factors not related to business performance.
The capital productivity ratio will be lower for companies whose assets are newer (and therefore less worn out, reflected in the financial statements by a higher book value) compared to companies with older assets (which are more worn out and thus recorded at a lower value). book value).
The capital productivity indicator may be unstable, since income may have a steady growth rate, and the increase in fixed assets occurs in spurts; therefore, each annual change in the indicator does not necessarily indicate important changes in the company's performance.
Asset turnover . The total asset turnover ratio measures the overall ability of a company to generate income with a given level of assets. A ratio of 1.20 would mean that the company generates 1.2 rubles of income for every 1 ruble of assets. A higher ratio indicates greater efficiency of the company.
Since this ratio includes both fixed and working capital, poor working capital management can skew the overall interpretation. Therefore, it is useful to analyze working capital and capital productivity ratios separately.
Short The asset turnover ratio may indicate poor performance or a relatively high level of capital intensity of the business. The metric also reflects strategic management decisions: for example, the decision to take a more labor-intensive (and less capital-intensive) approach to one's business (and vice versa).
The second important group of indicators are profitability and profitability ratios. These include the following coefficients:
Table 3 – Profitability and Profitability Indicators
|
Profitability and profitability indicator |
Numerator |
Denominator |
|
Net profit |
Average asset value |
|
|
Net profit |
||
|
Gross Margin |
Gross profit |
|
|
Revenue from sales |
||
|
Net profit |
||
|
Average asset value |
Net profit |
|
|
Average cost of equity |
Net profit |
Profitability indicator assets shows how much profit or loss the company receives for each ruble of invested assets. A high value of the indicator indicates the effective financial performance of the enterprise.
Return on equity is a more important indicator for the owners of the enterprise, since this coefficient is used when assessing investment alternatives. If the value of the indicator is higher than in alternative investment instruments, then we can talk about the high-quality financial activity of the enterprise.
Margin indicators provide insight into sales performance. Gross Margin shows how many resources remain in the company for management and sales expenses, interest costs, etc. Operating margin demonstrates the effectiveness of the organization's operational process. This indicator allows you to understand how much operating profit will increase if sales increase by one ruble. Net Margin takes into account the influence of all factors.
Return on assets and equity allows you to determine how much time the company needs for the funds raised to pay off.
Analysis of the financial condition of the enterprise
Financial condition, as stated above, means the stability of the current financial and economic system of the enterprise. To study this aspect, you can use the following groups of indicators.
Table 4 – Groups of indicators that are used in the state assessment process
Liquidity ratios (liquidity ratios)
Liquidity analysis, which focuses on cash flow, measures a company's ability to meet its short-term obligations. The fundamentals of this group are a measure of how quickly assets are converted into cash. During daily operations, liquidity management is usually achieved through the efficient use of assets.
The level of liquidity must be considered depending on the industry in which the enterprise operates. A particular company's liquidity position may also vary depending on its anticipated need for funds at any given time.
Assessing the adequacy of liquidity requires an analysis of a company's historical funding needs, current liquidity position, expected future funding needs, and options for reducing funding requirements or raising additional funds (including actual and potential sources of such funding).
Large companies tend to have better control over the level and composition of their liabilities compared to smaller companies. Thus, they may have more potential sources of financing, including owner's capital and credit market funds. Access to capital markets also reduces the required liquidity buffer compared to companies without such access.
Contingent obligations such as letters of credit or financial guarantees may also be relevant in assessing liquidity. The importance of contingent liabilities varies between the non-banking and banking sectors. In the non-banking sector, contingent liabilities (usually disclosed in a company's financial statements) represent a potential cash outflow and must be included in the assessment of a company's liquidity.
Calculation of liquidity ratios
Key liquidity ratios are presented in Table 5. These liquidity ratios reflect the position of a company at a particular point in time and therefore use data at the end of the balance sheet date rather than average balance sheet values. Indicators of current, quick and absolute liquidity reflect the company's ability to pay current obligations. Each uses a progressively stricter definition of liquid assets.
Measures how long a company can pay its daily cash expenses using only existing liquid assets, without additional cash flows. The numerator of this ratio includes the same liquid assets used in quick liquidity, and the denominator is an estimate of daily cash expenses.
To obtain daily cash expenses, the total amount of cash expenses for the period is divided by the number of days in the period. Therefore, to obtain cash expenses for a period, it is necessary to summarize all expenses in the income statement, including such as: cost; sales and administrative expenses; other expenses. However, the amount of expenses should not include non-cash expenses, for example, the amount of depreciation.
Table 5 – Liquidity indicators
|
Liquidity indicators |
Numerator |
Denominator |
|
Current assets |
Current responsibility |
|
|
Current assets - inventories |
Current responsibility |
|
|
Short-term investments and cash and cash equivalents |
Current responsibility |
|
|
Guard interval indicator |
Current assets - inventories |
Daily expenses |
|
Inventory turnover period + accounts receivable turnover period – accounts payable turnover period |
The financial cycle is a metric that is not calculated in ratio form. It measures the length of time it takes for a business to go from putting in cash (invested in an activity) to receiving cash (as a result of the activity). During this period of time, the company must finance its investment activities from other sources (i.e., debt or equity).
Interpretation of liquidity ratios
Current liquidity . This indicator reflects current assets (assets that are expected to be consumed or converted into cash within one year) per ruble of current liabilities (liabilities maturing within one year).
More high the ratio indicates a higher level of liquidity (i.e. greater ability to meet short-term obligations). A current ratio of 1.0 would mean that the book value of current assets is exactly equal to the book value of all current liabilities.
More low the value of the indicator indicates less liquidity, which implies greater dependence on operating cash flow and external financing to meet short-term obligations. Liquidity affects a company's ability to borrow money. The underlying assumption of the current ratio is that inventory and receivables are liquid (if inventory and receivables turnover ratios are low, this is not the case).
Quick ratio . The quick ratio is more conservative than the current ratio because it includes only the most liquid current assets (sometimes called "quick assets"). Like the current ratio, a higher quick ratio indicates the ability to meet debt obligations.
This indicator also reflects the fact that inventories cannot be easily and quickly converted into cash, and, in addition, the company will not be able to sell its entire inventory of raw materials, supplies, goods, etc. for an amount equal to its book value, especially if the inventory needs to be sold quickly. In situations where inventory is illiquid (for example, in the case of a low inventory turnover ratio), quick liquidity may be a better measure of liquidity than current ratio.
Absolute liquidity . The ratio of cash to current liabilities usually provides a reliable measure of the liquidity of an individual business in a crisis situation. Only highly liquid short-term investments and cash are included in this indicator. However, it is worth considering that in a crisis, the fair value of marketable securities may decline significantly as a result of market factors, in which case it is advisable to use only cash and equivalents in the process of calculating absolute liquidity.
Guard interval indicator . This ratio measures how long a company can continue to pay its expenses with its existing liquid assets without receiving any additional cash inflow.
A guard interval ratio of 50 would mean that the company can continue to pay its operating expenses for 50 days from fast assets without any additional cash inflows.
The higher the protective interval indicator, the higher the liquidity. If a company's safety margin is very low relative to its peers or relative to the company's own history, the analyst needs to determine whether there is sufficient cash flow to enable the company to meet its obligations.
Financial cycle . This indicator indicates the amount of time that passes from the moment an enterprise invests money in other forms of assets until the moment it collects funds from clients. A typical operating process involves receiving inventory on a deferred basis, which creates accounts payable. The company then also sells this inventory on credit, resulting in an increase in accounts receivable. After this, the company pays its invoices for the goods and services supplied, and also receives payment from customers.
The time between spending cash and collecting cash is called the financial cycle. More short cycle indicates greater liquidity. It means that a company must finance its inventory and accounts receivable only for a short period of time.
More long cycle indicates lower liquidity; this means that the company must finance its inventory and accounts receivable over a longer period of time, which may result in the need to raise additional funds for working capital.
Indicators of financial stability and solvency
Solvency ratios are mainly of two types. Debt ratios (type one) focus on the balance sheet and measure the amount of debt capital relative to a company's equity or total funding sources.
Coverage ratios (the second type of ratio) focus on the income statement and measure a company's ability to cover its debt payments. All of these indicators can be used in assessing the creditworthiness of a company and, therefore, in assessing the quality of the company's bonds and other debt obligations.
Table 6 – Financial stability indicators
|
Indicators |
Numerator |
Denominator |
|
Total liabilities (long-term + short-term liabilities) |
Total liabilities |
|
|
Equity |
Total liabilities |
|
|
Debt to equity |
Total liabilities |
Equity |
|
Financial leverage |
Equity |
|
|
Interest coverage ratio |
Earnings before taxes and interest |
Percentage to be paid |
|
Fixed charge coverage ratio |
Profit before tax and interest + lease payments + rent |
Interest payable + lease payments + rent |
In general, these indicators are most often calculated in the manner shown in Table 6.
Interpretation of solvency ratios
Financial dependence indicator . This ratio measures the percentage of total assets financed by debt. For example, a debt-to-asset ratio of 0.40 or 40 percent indicates that 40 percent of a company's assets are financed by debt. Generally, a higher debt ratio means higher financial risk and thus weaker solvency.
Financial autonomy indicator . The indicator measures the percentage of a company's capital (debt and equity) represented by equity. Unlike the previous ratio, a higher value usually means lower financial risk and thus indicates strong solvency.
Debt to Equity Ratio . The debt-to-equity ratio measures the amount of debt capital relative to equity capital. The interpretation is similar to the first indicator (i.e., a higher ratio indicates weaker solvency). A ratio of 1.0 would indicate equal amounts of debt and equity, equivalent to a debt-to-liability ratio of 50 percent. Alternative definitions of this ratio use the market value of shareholders' equity rather than its book value.
Financial leverage . This ratio (often simply called the leverage ratio) measures the amount of total assets supported by each monetary unit of equity. For example, a value of 3 for this indicator means that every 1 ruble of capital supports 3 rubles of total assets.
The higher the leverage ratio, the more leverage a company has to use debt and other liabilities to finance assets. This ratio is often defined in terms of average total assets and average total equity and plays an important role in the DuPont return on equity decomposition.
Interest coverage ratio . This ratio measures how many times a company can cover its interest payments through earnings before interest and taxes. A higher interest coverage ratio indicates stronger solvency and solvency, providing creditors with high confidence that the company can service its debt (i.e., banking sector debt, bonds, bills, debt of other enterprises) through operating profits.
Fixed charge coverage ratio . This metric takes into account fixed expenses or liabilities that result in a company's steady cash outflow. It measures the number of times a company's earnings (before interest, taxes, rent, and leasing) can cover its interest and lease payments.
Similar to the interest coverage ratio, a higher fixed charge ratio implies strong solvency, meaning that a business can service its debt through its core business. The indicator is sometimes used to determine the quality and likelihood of receiving dividends on preferred shares. If the indicator value is higher, this indicates a high probability of receiving dividends.
Analysis of the financial activities of an enterprise using the example of PJSC Aeroflot
The process of analyzing financial activities can be demonstrated using the example of the well-known company PJSC Aeroflot.
Table 6 - Dynamics of assets of PJSC Aeroflot in 2013-2015, million rubles.
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Indicators |
Absolute deviation, +,- |
Relative deviation, % |
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Intangible assets |
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Research and development results |
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Fixed assets |
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Long-term financial investments |
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Deferred tax assets |
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Other noncurrent assets |
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NON-CURRENT ASSETS TOTAL |
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Value added tax on purchased assets |
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Accounts receivable |
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Short-term financial investments |
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Cash and cash equivalents |
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Other current assets |
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CURRENT ASSETS TOTAL |
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As can be judged from the data in Table 6, during 2013-2015 there is an increase in the value of assets - by 69.19% due to the growth of current and non-current assets (Table 6). In general, the company is able to effectively manage working resources, because in conditions of sales growth of 77.58%, the amount of current assets increased only by 60.65%. The credit policy of the enterprise is of high quality: in conditions of significant growth in revenue, the amount of receivables, the basis of which was the debt of buyers and customers, increased by only 45.29%.
The amount of cash and equivalents is growing from year to year and amounted to about 29 billion rubles. Considering the value of the absolute liquidity indicator, it can be argued that this indicator is too high - if the absolute liquidity of UTair’s largest competitor is only 19.99, then in Aeroflot PJSC this indicator was 24.95%. Money is the least productive part of assets, so if there are available funds, they should be directed, for example, to short-term investment instruments. This will allow you to receive additional financial income.
Due to the depreciation of the ruble, the value of inventories increased significantly due to an increase in the cost of components, spare parts, materials, as well as due to an increase in the cost of jet fuel despite a decrease in oil prices. Therefore, inventories grow faster than sales volumes.
The main factor in the growth of non-current assets is the increase in accounts receivable, payments for which are expected more than 12 months after the reporting date. The basis of this indicator is made up of advances for the supply of A-320/321 aircraft, which the company will receive in 2017-2018. In general, this trend is positive, as it allows the company to ensure development and increase competitiveness.
The company's financing policy is as follows:
Table 7 – Dynamics of sources of financial resources of PJSC Aeroflot in 2013-2015, million rubles.
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Indicators |
Absolute deviation, +,- |
Relative deviation, % |
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Authorized capital (share capital, authorized capital, contributions of partners) |
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Own shares purchased from shareholders |
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Revaluation of non-current assets |
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Reserve capital |
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Retained earnings (uncovered loss) |
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OWN CAPITAL AND RESERVES |
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Long-term borrowed funds |
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Deferred tax liabilities |
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Provisions for contingent liabilities |
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LONG-TERM LIABILITIES TOTAL |
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Short-term borrowed funds |
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Accounts payable |
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revenue of the future periods |
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Reserves for upcoming expenses and payments |
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SHORT-TERM LIABILITIES TOTAL |
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A clearly negative trend is a reduction in the amount of equity capital by 13.4 over the period under study due to a significant net loss in 2015 (Table 7). This means that the wealth of investors has decreased significantly, and the level of financial risks has increased due to the need to attract additional funds to finance the growing volume of assets.
As a result, the amount of long-term liabilities increased by 46%, and the amount of current liabilities by 199.31%, which led to a catastrophic decline in solvency and liquidity indicators. A significant increase in borrowed funds leads to an increase in financial costs for debt servicing.
Table 8 – Dynamics of financial results of PJSC Aeroflot in 2013-2015, million rubles.
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Indicators |
Absolute deviation, +,- |
Relative deviation, % |
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Cost of sales |
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Gross profit (loss) |
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Business expenses |
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Administrative expenses |
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Profit (loss) from sales |
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Income from participation in other organizations |
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Interest receivable |
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Percentage to be paid |
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Other income |
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other expenses |
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Profit (loss) before tax |
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Current income tax |
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Change in deferred tax liabilities |
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Change in deferred tax assets |
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Net income (loss) |
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In general, the process of generating the financial result was ineffective due to an increase in interest payable and other expenses by 270.85%, as well as an increase in other expenses by 416.08% (Table 8). A significant increase in the latter indicator was caused by the write-off of Aeroflot PJSC’s share in the authorized capital of Dobrolet LLC due to the termination of operations. Although this is a significant loss of funds, it is not a permanent expense, so it does not indicate anything negative about the ability to carry out uninterrupted operations. However, other reasons for the increase in other expenses may threaten the company's stable operations. In addition to the write-off of some shares, other expenses also increased due to leasing expenses, expenses from hedging transactions, as well as the formation of significant reserves. All this indicates ineffective risk management within financial activities.
Indicators
Absolute deviation, +,-
Current ratio
Quick ratio
Absolute liquidity ratio
Ratio of short-term receivables and payables
Liquidity indicators indicate serious problems with solvency already in the short term (Table 9). As stated earlier, absolute liquidity is excessive, which leads to incomplete use of the financial potential of the enterprise.
On the other hand, the current ratio is significantly below normal. If in UTair, the company’s direct competitor, the figure was 2.66, then in PJSC Aeroflot it was only 0.95. This means that the company may have problems paying current obligations on time.
Table 10 - Financial stability indicators of PJSC Aeroflot in 2013-2015.
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Indicators |
Absolute deviation, +,- |
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Own working capital, million rubles. |
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Coefficient of provision of current assets with own funds |
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Maneuverability of own working capital |
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Inventory supply ratio with own working capital |
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Financial autonomy ratio |
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Financial dependency ratio |
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Financial leverage ratio |
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Equity agility ratio |
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Short-term debt ratio |
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Financial stability ratio (investment coverage) |
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Asset mobility ratio |
Financial autonomy also decreased significantly to 26% in 2015 from 52% in 2013. This indicates a lower level of creditor protection and a high level of financial risks. Liquidity and financial stability indicators made it clear that the company's condition is unsatisfactory. Consider also the company's ability to generate positive financial results. Table 11 – Indicators of business activity of PJSC Aeroflot (turnover indicators) in 2014-2015.
In general, the turnover of the main elements of assets, as well as equity capital, increased (Table 11). However, it is worth noting that the reason for this trend is the growth of the national currency, which has led to a significant increase in ticket prices. It is also worth noting that asset turnover is significantly higher than in direct competitor UTair. Therefore, it can be argued that, in general, the operating process in the company is effective. Table 12 – Profitability (loss) indicators of Aeroflot PJSC
The company was unable to generate profit in 2015 (Table 12), which led to a significant deterioration in financial results. For every ruble of assets raised, the company received 11.18 kopecks of net loss. In addition, the owners received 32.19 kopecks of net loss for every ruble of invested funds. Therefore, it is obvious that the company's financial performance is unsatisfactory. 2. Thomas R. Robinson, International financial statement analysis / Wiley, 2008, 188 pp. 3. website – Online program for calculating financial indicators // URL: https://www.site/ru/ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Analysis of the financial activities of the enterprise
The financial condition of an economic entity is a characteristic of its financial competitiveness (i.e., solvency, creditworthiness), the use of financial resources and capital, and the fulfillment of obligations to the state and other economic entities. The financial condition of an economic entity includes an analysis of: profitability and profitability; financial stability; creditworthiness; use of capital; currency self-sufficiency.
Sources of information are the balance sheet and its annexes, statistical and operational reporting. For analysis and planning, the standards in force in the business entity are used. Each business entity develops its own targets, norms, standards, tariffs and limits, a system for their assessment and regulation of financial activities. This information constitutes his trade secret, and sometimes his know-how.
Analysis of financial condition is carried out using the following basic techniques: comparison, summary and grouping, chain substitutions. The method of comparison is to compare the financial indicators of the reporting period with their planned values (standard, norm, limit) and with the indicators of the previous period. The method of summary and grouping is to combine information materials into analytical tables. The method of chain substitutions is used to calculate the magnitude of the influence of individual factors in the overall complex of their impact on the level of the aggregate financial indicator. This technique is used in cases where the relationship between indicators can be expressed mathematically in the form of a functional relationship. The essence of the method of chain substitutions is that, sequentially replacing each reporting indicator with a basic one (i.e., the indicator with which the analyzed indicator is compared), all other indicators are considered as unchanged. This replacement allows us to determine the degree of influence of each factor on the overall financial indicator.
The profitability of an economic entity is characterized by absolute and relative indicators. The absolute profitability indicator is the amount of profit or income. The relative indicator is the level of profitability. The level of profitability of business entities associated with the production of products (goods, works, services) is determined by the percentage ratio of profit from sales of products to its cost. The level of profitability of trade and public catering enterprises is determined by the percentage of profit from the sale of goods (public catering products) to turnover.
In the process of analysis, the dynamics of changes in the volume of net profit, the level of profitability and the factors that determine them are studied. The main factors influencing net profit are the volume of revenue from sales of products, the level of cost, the level of profitability, income from non-operating operations, expenses on non-operating operations, the amount of income tax and other taxes paid from profits. The impact of revenue growth on profit growth is manifested through a reduction in costs. All costs in relation to the volume of revenue can be divided into two groups: semi-fixed and variable. Conditionally fixed costs are those whose amount does not change when revenue from product sales changes. This group includes: rent, depreciation of fixed assets, depreciation of intangible assets, etc. These costs are analyzed by absolute amount. Variable costs are costs, the amount of which changes in proportion to changes in the volume of revenue from sales of products. This group covers costs of raw materials, transportation costs, labor costs, etc. These costs are analyzed by comparing cost levels as a percentage of revenue.
The dependence of profit on sales is expressed using a profitability graph, where point K is the break-even point. It shows the maximum amount of revenue from the sale of products in value (om) and in natural units of measurement (on), below which the activity of an economic entity will be unprofitable, since the cost line is higher than the line of revenue from product sales. Profitability charts provide a very simple and effective method for approaching complex problems such as: what will happen to profit if output decreases; what will happen to profit if price is increased, costs are reduced, and sales fall? The main task of constructing a profitability graph is to determine the break-even point - the point for which the revenue received is equal to cash expenses.
The calculation can be done analytically. It consists in determining the minimum volume of revenue from sales of products at which the level of profitability of an economic entity will be greater than 0%.
Tmin = (Ipost*T) / (T-Iper) ,
where Tmin is the minimum amount of revenue at which the profitability level is greater than 0%;
Ipost - the amount of conditionally fixed costs, rub.;
Iper - the amount of variable costs, rub.;
T - sales revenue, rub.
According to the balance sheet, the movement of fixed assets, working capital and other assets for the analyzed period is compared, as well as the movement of sources of funds shown in the liabilities side of the balance sheet. Sources of financial resources are divided into own and borrowed. An increase in the share of own funds positively characterizes the work of an economic entity. Their share in the total amount of sources, equal to 60% or more, indicates the financial independence of the subject
Analysis of the availability and structure of working capital is carried out by comparing the value of these funds at the beginning and end of the analyzed period. Working capital, for which standards have been established in an economic entity, are compared with these standards, and a conclusion is made about the lack or surplus of the standardized funds.
Particular attention is paid to the status of accounts payable and receivable. These debts may be normal or unjustified. Unjustified accounts payable include debt to suppliers for settlement documents not paid on time. Unjustified receivables cover debt for claims, compensation for material damage (shortages, theft, damage to valuables), etc. Unjustified debt is a form of illegal diversion of working capital and violation of financial discipline. It is important to establish the timing of debt occurrence in order to monitor their liquidation on time.
Solvency analysis is carried out by comparing the availability and receipt of funds with essential payments. Solvency is most clearly revealed when analyzing it over a short period of time (a week, half a month).
Depending on the degree of liquidity, i.e. the rate of conversion into cash, the assets of a business entity are divided into the following groups:
A1 - the most liquid assets. These include all funds of the enterprise (cash and in accounts) and short-term financial investments (chain securities);
A2 - quickly realizable assets, including accounts receivable and other assets;
A3 - slowly selling assets. This includes articles in Section II of the asset “Inventories and Costs” with the exception of “Deferred Expenses”, as well as articles “Long-term financial investments”, “Settlements with founders” from Section I of the asset;
A4 - difficult to sell assets. These are fixed assets, intangible assets, unfinished capital investments, equipment for installation.
Balance sheet liabilities are grouped according to the degree of urgency of their payment:
P1 - the most urgent liabilities. These include accounts payable and other liabilities;
P2 - short-term liabilities, covering short-term loans and borrowed funds;
P3 - long-term liabilities, include long-term loans and borrowed funds;
P4 - permanent liabilities. These include articles in Section I of the liability “Sources of own funds”. To maintain the balance of assets and liabilities, the total of this group is reduced by the amount of the item “Deferred expenses”.
To determine the liquidity of the balance sheet, you should compare the results of the given groups for assets and liabilities. The balance is considered absolutely liquid if A, > P1, A, > P2, A, > P3, A P4.
The analysis of the use of capital is carried out in relation to the total amount and to the components of capital. The efficiency of capital use as a whole is determined by the level of return on capital, which is the percentage of balance sheet profit to the amount of capital (to the sum of working capital, fixed assets, intangible assets). Analysis of the use of working capital is carried out using indicators of the turnover of working capital in them, the turnover ratio. The turnover of working capital in days is determined by dividing the average balance of working capital by the one-day amount of revenue from sales of products. The turnover ratio is the ratio of the amount of revenue for the analyzed period (year, quarter) to the average balance of working capital. Accelerating (slowing down) the turnover of funds releases (additionally involves) funds from circulation. The amount of these released funds is determined by multiplying the change in turnover in days by the one-day amount of revenue.
Analysis of the use of fixed assets of intangible assets is carried out using indicators of capital productivity and capital intensity. The capital productivity of fixed assets (intangible assets) is determined by the ratio of the amount of revenue for the analyzed period to the average cost of fixed assets (intangible assets). The capital intensity of products is determined by the ratio of the average cost of fixed assets (intangible assets) to the amount of revenue for the analyzed period. An increase in capital productivity, i.e. a decrease in capital intensity, indicates an increase in the efficiency of use of fixed assets and leads to savings in capital investments. The amount of this savings (additional investment) is derived by multiplying the amount of reduction (increase) in the capital intensity of products by the amount of revenue for the analyzed period. Currency self-sufficiency is characterized by the excess of foreign currency receipts over its expenses for the analyzed period.
Profitability (profitability) analysis
The profitability of an economic entity is characterized by absolute and relative indicators. The absolute profitability indicator is the amount of profit or income. The relative indicator is the level of profitability. Profitability represents the yield or profitability of the production and trading process. Its value is measured by the level of profitability. The level of profitability of business entities associated with the production of products (goods, works, services) is determined by the percentage ratio of profit from sales of products to its cost:
p = p/i * 100%,
where p is the level of profitability, %;
n - profit from sales of products, rub.;
and - production cost, rub.
The level of profitability of trade and public catering enterprises is determined by the percentage of profit from the sale of goods (public catering products) to turnover.
In the process of analysis, the dynamics of changes in the volume of net profit, the level of profitability and the factors that determine them are studied. The main factors influencing net profit are the volume of revenue from sales of products, the level of cost, the level of profitability, income from non-operating operations, expenses on non-operating operations, the amount of income tax and other taxes paid from profits.
An analysis of the profitability of a business entity is carried out in comparison with the plan and the previous period. In modern conditions of strong inflationary processes, it is important to ensure comparability of indicators and eliminate their influence on price increases. The analysis is carried out based on work data for the year. Last year's indicators are brought into comparability with the reporting year's indicators using price indexation, the methodology of which was discussed in the section "Financial resources and capital".
Financial stability analysis
A financially stable business entity is one that, using its own funds, covers funds invested in assets (fixed assets, intangible assets, working capital), does not allow unjustified receivables and payables, and pays its obligations on time. The main thing in financial activities is the correct organization and use of working capital. Therefore, in the process of analyzing the financial condition, the main attention is paid to the rational use of working capital.
Characteristics of financial stability include analysis of:
· composition and placement of assets of an economic entity;
· dynamics and structure of sources of financial resources;
Availability of own working capital;
· accounts payable;
· availability and structure of working capital;
· accounts receivable;
solvency.
An important indicator for assessing financial stability is the growth rate of real assets. Real assets are actually existing property and financial investments at their actual value. Real assets do not include intangible assets, depreciation of fixed assets and materials, use of profits, and borrowed funds. The growth rate of real assets characterizes the intensity of property growth and is determined by the formula:
A = ((C1+Z1+D1)/(C0+Z0+D0) - 1) * 100%,
where A is the growth rate of real assets, %;
C - fixed assets and investments excluding depreciation, trade margins on unsold goods, intangible assets, used profits;
3 - inventories and costs;
D - cash, settlements and other assets excluding used borrowed funds;
index "0" - previous (base) year;
index "1" - reporting (analyzed) year.
Thus, if the growth rate of real assets for the year was 0.4%, then this indicates an improvement in the financial stability of the business entity. The next point of analysis is to study the dynamics and structure of sources of financial resources.
Credit analysis
The creditworthiness of a business entity means whether it has the prerequisites for obtaining a loan and the ability to repay it on time. The borrower's creditworthiness is characterized by his accuracy in making payments on previously received loans, his current financial condition and prospects for change, and the ability, if necessary, to mobilize funds from various sources.
The bank, before providing a loan, determines the degree of risk that it is willing to take on and the size of the loan that can be provided.
Analysis of lending conditions involves studying the following issues:
The borrower's credibility, which is characterized by the timeliness of payments for previously received loans, the quality of the reports submitted, the responsibility and competence of management;
The borrower's ability to produce competitive products;
Income. At the same time, an assessment is made of the profit received by the bank when lending to specific costs of the borrower in comparison with the average profitability of the bank. The level of bank income must be linked to the degree of risk in lending. The bank evaluates the amount of profit received by the borrower from the point of view of the possibility of paying interest to the bank when carrying out normal financial activities;
Purpose of using credit resources;
The loan amount is based on the borrower’s balance sheet liquidity measures, the ratio between equity and borrowed funds;
Repayment is made by analyzing the repayment of the loan through the sale of material assets, provided guarantees and the use of collateral rights;
Securing the loan, i.e. studying the charter and regulations from the point of view of determining the bank’s right to take the borrower’s assets, including securities, as collateral against the loan issued.
When analyzing creditworthiness, a number of indicators are used. The most important of these are the rate of return on invested capital and liquidity. The rate of return on invested capital is determined by the ratio of the amount of profit to the total amount of liabilities on the balance sheet:
where P is the rate of profit;
P - amount of profit for the reporting period (quarter, year), rub.,
ΣК - total amount of liabilities, rub.
The growth of this indicator characterizes the trend of the borrower’s profitable activity and its profitability.
The liquidity of a business entity is its ability to quickly repay its debt. It is determined by the ratio of debt and liquid funds, i.e. funds that can be used to pay off debts (cash, deposits, securities, salable elements of working capital, etc.). Essentially, the liquidity of a business entity means the liquidity of its balance sheet, which is expressed in the degree to which the obligations of the business entity are covered by its assets, the period of conversion of which into money corresponds to the period of repayment of obligations. Liquidity means the unconditional solvency of an economic entity and presupposes constant equality between assets and liabilities, both in total amount and in terms of maturity.
Analysis of balance sheet liquidity consists of comparing funds for assets, grouped by the degree of their liquidity and arranged in descending order of liquidity, with liabilities for liabilities, grouped by their maturity dates and arranged in ascending order of maturity. Depending on the degree of liquidity, i.e. the rate of transformation into cash, the assets of a business entity are divided into the following groups:
1 - the most liquid assets. These include all funds (cash and accounts) and short-term financial investments (securities).
2 - quickly realizable assets. They include accounts receivable and other assets;
3 - slowly selling assets. This includes articles in Section II of the asset “Inventories and Costs” with the exception of “Deferred Expenses”, as well as articles “Long-term financial investments”, “Settlements with founders”.
Capital utilization analysis
Capital investment must be effective. The efficiency of capital use refers to the amount of profit per ruble of invested capital. Capital efficiency is a complex concept that includes the use of working capital, fixed assets, and intangible assets. Therefore, an analysis of the efficiency of capital is carried out on individual parts of it, then a consolidated analysis is done.
The efficiency of using working capital is characterized primarily by its turnover, which refers to the duration of the passage of funds through individual stages of production and circulation. The time during which working capital is in circulation, i.e. successively move from one stage to another, constitutes the period of turnover of working capital. The turnover of working capital is calculated by the duration of one turnover in days (turnover of working capital in days) or the number of turns during the reporting period (turnover ratio). The duration of one turnover in days is the ratio of the amount of the average balance of working capital to the amount of one-day revenue for the analyzed period:
where Z is the turnover of working capital, days;
t - number of days of the analyzed period (90, 360);
T - revenue from sales of products for the analyzed period, rub.
The average balance of working capital is defined as the average of the chronological moment series, calculated from the aggregate value of the indicator at different points in time:
O = (1/2о1 + о2 + ... + 1/2Оn) / (П-1),
where O1; O2; On - balance of working capital on the first day of each month, rub.;
P - number of months.
The capital turnover ratio characterizes the amount of revenue from sales per one ruble of working capital. It is defined as the ratio of the amount of revenue from sales of products to the average balance of working capital according to the formula
O - average balance of working capital, rub.
The turnover ratio of funds is their return on assets. Its growth indicates a more efficient use of working capital. The turnover ratio simultaneously shows the number of turnovers of working capital for the analyzed period and can be calculated by dividing the number of days of the analyzed period by the duration of one turnover in days (turnover in days):
where Ko is the turnover ratio, revolutions;
1 - number of days of the analyzed period (90, 360);
Z - turnover of working capital in days.
An important indicator of the efficiency of using working capital is also the utilization rate of funds in circulation. The utilization rate of funds in circulation characterizes the amount of working capital advanced per ruble of revenue from product sales. In other words, it represents the working capital intensity, i.e. costs of working capital (in kopecks) to receive 1 rub. sold products (works, services). The utilization rate of funds in circulation is the ratio of the average balance of working capital to the amount of revenue from product sales:
K3 = O/T * 100%,
where K3 is the load factor of funds in circulation, kopecks;
O - average balance of working capital, rub.;
T - revenue from sales of products for the analyzed period, rub.;
100 - conversion of rubles to kopecks.
The coefficient of loading of funds in circulation (Kd) is the inverse value of the coefficient of turnover of funds (Kts). The lower the load factor, the more efficiently working capital is used.
Analysis of the level of self-financing
Self-financing means financing from your own sources - depreciation charges and profits. The term “self-financing” stands out from the generally accepted position of financing the production and trading process, which is primarily due to the increasing role of depreciation charges and profits in providing business entities with monetary capital through internal sources of accumulation. However, a business entity cannot always fully provide itself with its own financial resources, therefore it widely uses borrowed and attracted funds as an element that complements self-financing. The principle of self-financing is implemented not only on the desire to accumulate one’s own financial sources, but also on the rational organization of the production and trading process, the constant renewal of fixed assets, and a flexible response to market needs. It is the combination of these methods in the economic mechanism that makes it possible to create favorable conditions for self-financing, i.e. allocating more of its own funds to finance its operating and capital needs.
The level of self-financing is assessed using the following coefficients:
1. Financial stability coefficient (FSC) is the ratio of one’s own and other people’s funds:
KFU = M / (K + Z),
Where ;
K - borrowed funds, rub.;
3 - accounts payable and other borrowed funds, rub.
The higher the value of this coefficient, the more stable the financial position of the business entity.
The sources of formation of own funds are the authorized capital, additional capital, deductions from profits (to the accumulation fund, to the consumption fund, to the reserve fund), targeted financing and revenues, lease obligations.
2: Self-financing ratio (Ks):
Ks = (P + A) / (K + Z),
K - borrowed funds, rub.
Z - accounts payable and other borrowed funds, rub.
This coefficient shows the ratio of sources of financial resources, i.e. How many times do own sources of financial resources exceed borrowed and attracted funds?
Since the value P + A represents one’s own funds aimed at financing expanded reproduction, this coefficient shows how many times these own funds exceed other people’s funds attracted for these purposes.
The self-financing coefficient characterizes a certain margin of financial strength of an economic entity. The higher the value of this coefficient, the higher the level of self-financing.
At the same time, the self-financing ratio is an indicator of the involvement of other people’s (borrowed, borrowed) funds in the economic process. This allows an economic entity to respond to negative changes in the ratio of its own and other sources of financial resources. When the self-financing ratio decreases, the business entity carries out the necessary reorientation of its production, trade, technical, financial, organizational, managerial and personnel policies.
3. Self-financing process sustainability coefficient (SCSP):
KUPS = Ks / KFU = (P + A)*(K + Z) / ((K + Z)*M) = (P + A) / M,
where P is profit directed to the accumulation fund, rub.;
A - depreciation charges, rub.;
M - own funds, rub.
The sustainability coefficient of the self-financing process shows the share of own funds allocated to finance expanded reproduction. The higher the value of this coefficient, the more stable the process of self-financing in an economic entity, the more effectively this method of a market economy is used.
4. Profitability of the self-financing process (P):
P = (A + P) / M * 100%,
where A - depreciation charges, rub.;
PE - net profit, rub.;
M - own funds, rub.
The process of self-financing is nothing more than the profitability of using your own funds. The level of profitability of the self-financing process shows the amount of total net income received from one ruble investment of one’s own financial resources, which can then be used for self-financing.
Source - Litovskikh A.M. Financial management: Lecture notes. Taganrog: TRTU Publishing House, 1999. 76 p.
The financial analysis is a method of assessing and forecasting the financial condition of an enterprise based on its financial statements.
The financial analysis- this is the process of studying the financial condition and main results of the financial activities of an enterprise in order to identify reserves for further increasing its market value.
This kind of analysis can be performed both by the management personnel of a given enterprise and by any external analyst, since it is mainly based on publicly available information.
The basis of information support analysis of the financial condition, as noted above, must be prepared by financial statements. Of course, additional information, mainly of an operational nature, can be used in the analysis, but it is only of an auxiliary nature.
As main sources of information For financial analysis the following can be used:
1. External data (-state of the economy, financial sector, political and economic state; - exchange rates; - securities rates, yield on securities; - alternative returns; - indicators of the financial condition of other companies;)
2. Internal data (-Accounting statements; -Management reporting.)
Main goal financial analysis is to obtain a small number of key (the most informative) parameters that give an objective and accurate picture of the financial condition of the enterprise, its profits and losses, changes in the structure of assets and liabilities, in settlements with debtors and creditors.
As a result of financial analysis, both the current financial condition of the enterprise and the expected parameters of the financial condition in the future are determined.
Thus, financial analysis can be defined as a method of accumulation, transformation and use of information of a financial nature, which has target :
- assess the current and future financial condition of the enterprise;
- assess the possible and appropriate pace of development of the enterprise from the standpoint of their financial support;
- identify available sources of funds and assess the possibility and feasibility of their mobilization;
- predict the position of the enterprise in the capital market.
The goals of financial analysis are achieved as a result of solving a certain interrelated set of analytical tasks
Objectives of financial analysis:
1. Analysis of assets (property).2. Analysis of funding sources.3. Analysis of solvency (liquidity).4. Financial stability analysis.5. Analysis of financial results and profitability.6. Analysis of business activity (turnover).7. Cash flow analysis.8. Analysis of investments and capital investments.9. Market value analysis.10. Bankruptcy probability analysis.11. Comprehensive assessment of financial condition.12. Preparation of financial position forecasts.13. Preparation of conclusions and recommendations.
Types of fin. Analysis:
1) dependent From organizational forms of implementation: internal, external (Internal analysis is carried out by employees of the enterprise. The information base of such analysis is much wider and includes any information circulating within the enterprise and useful for making management decisions. Accordingly, the possibilities of analysis are expanded. External financial analysis is carried out by analysts , who are outsiders to the enterprise and therefore do not have access to the internal information base of the enterprise. External analysis is less detailed and more formalized.)
2) stuck From the scope of the study: complete, thematic
3) depending Depending on the scope of analysis: for the enterprise as a whole, for a division or structural unit, for a separate financial unit. Operations
4) depending From the period of the study: preliminary, current, subsequent
To solve specific problems of financial analysis, a whole a number of special methods , allowing to obtain a quantitative assessment of individual aspects of the enterprise’s activities. In financial practice, depending on the methods used, the following systems of financial analysis carried out at the enterprise are distinguished: trend, structural, comparative and ratio analysis.
1. Trending (horizontal) financial analysis is based on the study of the dynamics of individual financial indicators over time. In the process of carrying out this analysis, the growth rates (gain) of individual indicators are calculated and the general trends in their change (or trend) are determined. The most widespread forms of trend (horizontal) analysis are:
1) comparison of financial indicators of the reporting period with indicators of the previous period (for example, with indicators of the previous decade, month, quarter);
2) comparison of financial indicators of the reporting period with indicators of the same period of the previous year (for example, indicators of the second quarter of the reporting year with similar indicators of the second quarter of the previous year). This form of analysis is used in enterprises with pronounced seasonal characteristics of economic activity;
3) comparison of financial indicators for a number of previous periods. The purpose of this analysis is to identify trends in changes in individual indicators characterizing the results of the financial activities of the enterprise. The results of such an analysis are usually presented graphically in the form of line graphs or a bar graph of changes in the indicator over time.
2. Structural (vertical) financial analysis is based on the structural decomposition of individual indicators. In the process of carrying out this analysis, the specific weights of individual structural components of financial indicators are calculated. The most widespread are the following forms of structural (vertical) analysis: analysis of assets, capital, cash flows.
3. Comparative financial analysis is based on comparing the values of individual groups of similar financial indicators with each other. In the process of carrying out this analysis, the sizes of absolute and relative deviations of the compared indicators are calculated. The most widespread forms of comparative analysis are: analysis of the financial indicators of an enterprise and industry average indicators, analysis of the financial indicators of a given enterprise and competitor enterprises, analysis of the financial indicators of individual structural units and divisions of a given enterprise, analysis of reporting and planned (normative) financial indicators:
4. Analysis of financial ratios is based on calculating the ratio of various absolute indicators to each other. In the process of carrying out this analysis, various relative indicators are determined that characterize various aspects of financial performance. The most widespread aspects of such analysis are: financial stability, solvency, asset turnover and profitability.
As mentioned above, in Western financial management, financial analysis refers to one of the types of analysis of financial statements - the calculation of financial ratios, and financial reporting - the accounting statements of an enterprise, adjusted for the purposes of financial analysis. In Russian theory and practice of financial management, financial analysis refers to the analysis of financial statements, including various types of analysis. Classification of types of financial analysis is carried out according to methods and goals.
1. Based on the methods, the following types of financial analysis are distinguished:
1) time (horizontal and trend);
2) vertical (structural);
3) comparative (spatial);
4) factor analysis;
5) calculation of financial ratios.
Time analysis refers to the analysis of changes in indicators over time. Depending on the number of moments or time periods selected for research, horizontal or trend analysis is distinguished (Figure).
Horizontal (time) analysis refers to the comparison of individual financial statements indicators with indicators of previous periods. Horizontal analysis consists of comparing the values of individual reporting items for the period preceding the reporting period and the reporting periods in order to identify sudden changes.
Trend (time) analysis refers to the analysis of changes in indicators over time, i.e. analysis of their dynamics. The basis of trend (time) analysis is the construction of dynamics series (dynamic or time rads). A dynamic series is understood as a series of numerical values of a statistical indicator, arranged in chronological order and characterizing changes in any phenomena over time. To build a time series, two elements are required:
1) series levels, which are understood as indicators whose specific values constitute a dynamic series;
2) moments or periods of time to which the levels relate.
Levels in a time series can be presented as absolute, average or relative values. The construction and analysis of time series allows us to identify and measure patterns of development of a phenomenon over time. It should be noted that patterns do not appear clearly at each specific level, but only in fairly long-term dynamics - trends, and at the same time other, for example, seasonal or random phenomena, are superimposed on the main pattern of dynamics. In this regard, the main task of analyzing time series is to identify the main tendency in changes in levels, which is called a trend.
The trend is a long-term dynamic.
Trend is the main tendency in changing the levels of time series.
Based on the time reflected in time series, they are divided into moment and interval.
A momentary dynamic series is understood as a series whose levels characterize the state of a phenomenon at certain dates (points in time).
An interval time series is a series whose levels characterize a phenomenon for a specific period of time. The values of the levels of an interval series, unlike the levels of a moment series, are not contained in previous or subsequent indicators, which allows them to be summed up and obtain a dynamic series of a more enlarged period - a series with a cumulative total.
Vertical (structural) analysis means determining the share of individual items in the final indicator of a section or balance sheet in comparison with similar indicators of previous periods.
Comparative (spatial) analysis refers to the comparison of indicators obtained as a result of horizontal and vertical analysis for the reporting period with similar indicators for the previous period in order to identify trends in changes in the financial position of the enterprise.
Factor analysis refers to the analysis of the influence of individual factors (reasons) on the financial performance indicators of an enterprise. Factor analysis is carried out using deterministic or stochastic methods.
The following types of factor analysis are distinguished:
1) direct factor analysis (analysis itself), in which not the effective indicator as a whole is studied, but its individual components;
2) reverse factor analysis (synthesis), in which, for analysis purposes, individual indicators are combined into a common effective indicator.
Calculation of financial ratios. The financial ratio is understood as the ratio of individual indicators of financial statements (items of assets and liabilities of the balance sheet, profit and loss statement), characterizing the current financial position of the enterprise. The following groups of financial ratios are distinguished:
1) liquidity;
2) solvency;
3) business activity (turnover);
4) profitability;
5) market activity.
2. Based on the objectives, the following types of financial analysis are distinguished:
1) express analysis;
2) in-depth analysis (table).
Express analysis is carried out in several stages. The transition from one stage to another occurs as interest increases. The main stages of an express analysis of the financial condition of an enterprise are: 1) familiarization with the results of the audit:
1) familiarization with financial statements and analysis of key financial indicators (liquidity, solvency, turnover, profitability, market activity);
2) analysis of the sources of the enterprise’s funds, directions and efficiency of their use.
At the first stage, the actual analysis of the financial statements as such is not carried out, but only familiarization with the auditor's report takes place. The audit report is drawn up as a result of an audit of the enterprise's annual financial statements by an independent accountant-auditor. The following types of audit report are distinguished:
1) standard, including:
Positive;
Positive with comments;
Negative;
2) non-standard conclusion, which is a refusal to draw up a conclusion.
A positive conclusion and a positive conclusion with comments are accepted for consideration. Depending on the results of familiarization with the auditor's report, a decision is made to conduct a financial analysis.
The second stage of the express analysis consists of a brief introduction to the content of the financial statements itself and the calculation of the main financial ratios.
The third stage of the express analysis consists of a more detailed acquaintance with the structure and volume of the enterprise’s funds, the sources of their formation and the efficiency of use.
Analysis of assets allows us to assess the optimality of their structure, which affects the property status and financial condition of the enterprise. Asset analysis includes:
1) analysis of the volume and share of individual asset items in their total;
2) analysis of fixed assets based on the calculation of their depreciation, renewal and disposal rates.
Analysis of liabilities allows you to assess the volume and ratio of equity and borrowed capital and, consequently, the degree of dependence of the enterprise on external sources of financing, as well as identify unfavorable items in the financial statements. Liability analysis includes:
1) analysis of the volume and structure of equity capital and its share in the total sources of funds (liabilities);
2) analysis of the volume and structure of long-term and short-term liabilities, as well as their weight in the overall total of sources of funds (liabilities).
Familiarization with the volume and structure of assets and liabilities makes it possible to identify unfavorable items in the financial statements, which should be divided into two groups:
1) items characterizing the unsatisfactory performance of the enterprise in previous periods (for example, uncovered losses of previous years);
2) items characterizing the unsatisfactory performance of the enterprise in the reporting period (for example, overdue accounts receivable; overdue loans and borrowings, including commercial debt to suppliers, represented by invoices and bills of exchange for payment).
An in-depth analysis of financial statements allows you to assess the real financial condition of an enterprise as of a certain date, changes in the financial position and financial results of the enterprise for the reporting period. Thus, the objectives of in-depth financial analysis should include:
1) assessment of the current financial condition of the enterprise;
2) assessment of the main changes in the financial position for the reporting period;
3) forecast of the financial condition of the enterprise for the near future.
The main indicators of the financial condition of the enterprise are:
1) liquidity;
2) solvency;
3) business activity;
4) profitability;
5) market activity.
In the Russian theory and practice of financial analysis, there are features of the approach to the interpretation of the above indicators:
1) the assessment of the current financial condition of the enterprise is carried out not by calculating financial ratios (liquidity, solvency, turnover, profitability, market activity), as in Western financial management, but by analyzing the balance sheet (horizontal, vertical, comparative, trend);
2) the concepts of “liquidity” and “solvency” are often unjustifiably equated;
3) the concepts of “liquidity” and “solvency” together make up the concept of “financial stability”, which is absent in the terminology of Western financial management.
Thus, the content of the Russian course “Financial Analysis” can be reduced to the following sections:
1) analysis of the current financial condition of the enterprise based on the dynamics of the balance sheet currency, horizontal, vertical and comparative analysis of the balance sheet;
2) analysis of the financial stability of the enterprise based on an analysis of liquidity and solvency indicators;
3) cash flow analysis;
4) analysis of business and market activity;
5) analysis of financial results and profitability.
6) analysis of the effectiveness of investment projects.
The object of financial analysis is accounting reporting, which is understood as a unified system of data on the property and financial position of an enterprise and the financial results of its activities. All enterprises forming a legal entity are required to prepare financial statements. Accounting statements are prepared on the basis of synthetic and analytical accounting data and in accordance with established forms.
Synthetic accounting means accounting, the basis of which is enlarged groupings of financial reporting indicators. Analytical accounting means accounting, the basis of which is detailed detail and characteristics of financial reporting indicators. Analytical accounting is carried out to detail synthetic accounting data. When preparing financial statements, certain requirements must be met. The financial statements should include only reliable, complete and neutral information that reflects an objective picture of financial and economic activities. The reliability of the data included in the financial statements must be documented by the results of the inventory of property and liabilities.
In each form of financial statements, data for each indicator is provided for two years: 1) for the year preceding the reporting year; 2) for the reporting year. If indicators for different periods for some reason turn out to be incomparable, it is necessary to adjust the earliest of them. The content of the adjustment must be disclosed in the appendices to the financial statements.
Some items of financial reporting forms are subject to disclosure in the relevant appendices. Unlike Western practice, financial statements are not adjusted for the purposes of financial analysis and are presented in their usual form. Forms of financial statements include:
1) balance sheet (form No. 1);
2) profit and loss statement (form No. 2);
3) report on changes in capital (form No. 3);
4) cash flow statement (form No. 4);
5) appendices to the balance sheet (form No. 5);
6) explanatory note (to forms No. 1-2);
7) auditor's report.
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