To assess the effectiveness of management policies implemented by company management, many techniques are used. One of them is the determination of financial stability ratios. This information is of interest to both the founders and lenders of the enterprise. Therefore, it is so important for financial analysts. One of the key elements of the presented methodology is the formula. The financial dependence ratio will allow you to evaluate the balance sheet structure and improve it in the future period. This is a very useful type of analysis. The formula for the coefficient of financial dependence is often used by Western analysts. In assessing the company's operations, this is one of the important indicators.
General information
Western economists call the Debt Ratio, which reveals the formula below. The financial dependence ratio is used to assess the structure of the balance sheet of the enterprise in terms of the distribution of its borrowed funds.
In our country, instead of determining the coefficient of financial dependence on the balance sheet, the formula of company autonomy is more often used. That is, an assessment of the structure of capital sources is carried out in terms of the availability of equity.
However, using the formula for calculating the coefficient of financial dependence, we can evaluate liabilities from the other side. This indicator is important for investors and indicates the solvency of the company. Based on these data, lenders conclude that it is advisable to provide a loan. Therefore, when conducting research on the capital structure of an enterprise, an assessment should be made of the dynamics and amount of borrowed funds.
Creditors capital
The borrowed capital of the enterprise is the number of its long-term and short-term liabilities to creditors.
These two articles of sources of liabilities add up to calculate the coefficient of financial dependence. The balance sheet formula excludes from the calculations such items as “deferred income” and “Reserves for future expenses”. The calculation of the financial dependency ratio formula is carried out for the reporting period without taking into account future receipts or decreases of the balance sheet currency.
Borrowing capital while reducing its amount in the balance sheet structure increases the stability of the company. But as the experience of Western manufacturers shows, it should be used by the enterprise to increase profitability.
Calculation formula
The financial dependence ratio, the balance sheet formula of which is calculated for the operating period, in general terms is as follows.
KZav. = Borrowed capital / Assets
To find the capitalized sources of financing that participate in the formula of the coefficient of dependence of the enterprise, make the following calculations:
ЗК = Long-term liabilities + Short-term liabilities - deferred income - Reserves for future expenses.
This allows us to determine in the long term the dependence of the company's activities on paid sources of capital.
Balance calculation formula
The financial dependency ratio of capitalized sources, the calculation formula of which was presented above, is determined using Form 1 of the accounting report.
To make the calculations, the following lines of the new balance should be used:
KZav. = (p. 1400 + p. 1500 - p. 1530 - p. 1540) / s. 1700.
This formula of the financial dependency ratio for balance lines has been relevant since 2011. For periods that were displayed before this deadline, another transcript of the articles of the financial dependence ratio will be relevant.
Normative value
The financial dependence ratio, the calculation formula of which was considered above, must be compared with the normative value.
In the economic literature, many authors indicate its value is less than 0.7. However, the Order of the Ministry of Regional Development of the Russian Federation 173 of April 17, 2010 regulates the standard of less than 0.8. Otherwise, the company is considered as dependent on borrowed capital.
It should also be noted that a too low value of the indicator indicates that the company is missing out on a chance to expand its business. After all, borrowed capital allows you to get a big profit. It should be noted that the financial dependence ratio, the formula for the lines of the balance of which was discussed in detail above, should take into account the characteristics of the industry sector of the organization.
Comprehensive analysis
To correctly assess the financial stability of the enterprise, it is necessary to consider the coefficient of dependence on attracted capital as a whole. For this, indicators of autonomy and leverage are calculated. They are similar to the field of research, but each formula allows them to look at indicators from a different angle. The financial dependence ratio is the inverse to the definition of autonomy. For this indicator, the ratio of own sources to the balance sheet currency is used. The financial leverage ratio allows you to calculate the optimal ratio of sources of liability.
