Solvency is considered one of the key indicators of the effectiveness of the company. It reflects the company's ability to cover all of its obligations.
Rating
The source of information for the analysis of solvency is the balance sheet. One of its main goals is to evaluate the company's assets, its obligations and the amount of equity. To determine these indicators, it is necessary to analyze the structure of the property and debts of the company, to establish the level of liquidity balance. In addition, the calculation and evaluation of solvency and economic stability ratios should be carried out. The normal financial condition of the company is characterized by a good level of ability to repay obligations. An unsatisfactory situation is indicated by a low solvency recovery ratio. The best option is when the company has free funds for circulation to pay debts. But the company can remain solvent even if it is possible to sell assets to pay off obligations. At the same time, the company may have no cash.
The value of the solvency recovery ratio
In accordance with the Federal Law "On Bankruptcy", the insolvency of an enterprise should be understood as the debtor declared by the debtor or an inability recognized by the court to fully satisfy the claims made by the creditors, or to pay obligatory payments. Prior to the date of adoption of the said law, another procedure for declaring a company bankrupt was in effect. For the company to become insolvent, it was necessary to carry out the calculation:
- The solvency recovery ratio.
- Total liquidity ratio.
- The coefficient of availability of its working capital.
Liquidity is a characteristic of a company's assets, which determines the possibility of their sale in the short term at a market price. The solvency recovery ratio of an enterprise acts as a financial, economic indicator reflecting the company's ability to reach the level of optimal liquidity for six months at the time of the reporting date.
Asset classification
Separation is based on liquidity ratio. Assets can be high, low and illiquid. Ascending distinguish:
- Unfinished construction projects, buildings, structures, equipment, machinery.
- The volume of raw materials and products in warehouses.
- Own shares or securities owned by the state.
- Funds in bank accounts.
Solvency Recovery Ratio: Formula
A description of this indicator is present in the Methodological provision, which determines the assessment of the financial position of the company and the unsatisfactory state of its balance. The document also contains an equation by which you can find the solvency recovery ratio. The formula is as follows: Kv = (K1F + 6 / T (K1F - K1H)) / 2.
The equation uses the liquidity indicator of the company and its standard:
- the actual figure of the degree of liquidity (at the end) is K1F;
- initial coefficient - K1N;
- indicator according to the standard - K1norm = 2;
- time to restore solvency (in months) - 6;
- reporting period (calculated in months) - T.
A more accurate result can be obtained for 4 or more periods. According to economists, the solvency recovery ratio is not an exceptional indicator to be adhered to.
The recognition of the balance sheet structure is unsatisfactory
In the analysis process, for an enterprise to be considered insolvent, any of the following conditions must be met:
- The liquidity ratio at the end of the reporting period is less than 2.
- The degree of provision with own funds by the reporting date is less than 0.1.
Let's consider what the solvency recovery ratio can be.
Example
Over the past year, the company's liquidity ratio at the beginning of the period was 0.97, and by the end - 1.18. Using the above formula, you can get: Qu = 1.18 + 6/12 (1.18 - 0.97) = 0.3528.
If the calculation results in an indicator greater than 1, then we can say that the company has the opportunity to achieve optimal financial condition over the next six months. If the solvency recovery ratio is less than one, then, accordingly, in the next six months, the company will not be able to achieve the necessary economic stability.
Forecasting
The recovery / loss ratio is considered one of the key in the management analysis of the company. These indicators allow you to plan financial and economic activities for a certain period. The solvency recovery ratio makes it possible to distribute operations and funds for the next six months to overcome the crisis. However, this situation can be avoided. To do this, calculate the probability indicator of the deterioration of the current liquidity of the company for three months following the reporting date: Coop = [K1f + 3 / T (K1f - K1n)] / K1norm.
A unit is taken for a benchmark with which the recovery / loss ratio is compared. If, when calculating the probability of a deteriorating financial situation, the indicator is more than 1, then this indicates that the company has every chance not to lose its liquidity. Accordingly, with a value less than 1, the company may become insolvent in the next three months.
Identification of false bankruptcy
Today, a slightly different assessment system operates. The analysis does not establish insolvency itself, but reveals signs of fictitious bankruptcy. They represent the fact that the company has a real opportunity to pay off obligations to creditors in full on the date of filing an application for declaring it insolvent. The identification of these signs is carried out when establishing the ability to pay debts by assets through the ratio of their size with the size of short-term liabilities. The calculations exclude consumption funds, upcoming income and reserves for payments and expenses. After making the necessary calculations, we can draw the appropriate conclusions:
- If the degree of security is equal to or greater than 1, then there are signs of fictitious bankruptcy.
- If the value is less than unity, then, accordingly, the insolvency is real.
