The payback period for equity capital is determined by the ratio. Financial management

Profitability is a fairly broad concept that can be applied to different components of any company. You can choose synonyms for it such as efficiency, payback or profitability. It can be applied to assets, capital, production, sales, etc. When calculating any of the performance indicators, the same questions are answered: “are resources being used correctly” and “are there benefits.” The same is true for return on equity (the formula used to calculate it is presented below).

Own capital and investors

Equity refers to the financial resources of the company owner, shareholders and investors. The last group is represented by people or companies that invest their funds in business development in third-party companies. It is important for them to know that their investments are profitable. Further cooperation and development of the company in the market depends on this.

Every company needs financial investments - both internal and external. And the situation is much more favorable when these funds are represented not by bank loans, but by investments from sponsors or owners.

How to understand whether it is worth continuing to invest in a particular company? Very simple. You just need to calculate your net worth. The formula is easy to use and transparent. It can be used for any organization based on balance sheet data.

Calculation of the indicator

What does the formula look like? Return on equity is calculated using the following calculation:

Rsk = PE/SK, where:

Rsk - return on capital.

SK is the company's own capital.

PE is the net profit of the enterprise.

The return on equity is most often calculated over a year. And all the necessary values are taken for the same period. The obtained result gives a complete picture of the enterprise’s activities and the profitability of equity capital.

Do not forget that not only but also borrowed funds can be invested in any company. In this case, return on equity, the calculation formula for which is given above, gives an objective assessment of the profit from each unit of money invested by investors.

If necessary, the profitability formula can be changed to obtain the result as a percentage. In this case, it is enough to multiply the resulting quotient by 100.

If you need to calculate an indicator for another period (for example, less than a year), then another formula is needed. Return on equity in such cases is calculated as follows:

Rsk = PE * (365 / Period in days) / ((SKnp + SKkp) / 2), where

SKnp and SKkp are equity capital at the beginning and end of the period, respectively.

Everything is relative

In order for investors or owners to fully assess the profitability of their investments, it is necessary to compare it with a similar indicator that could be obtained by financing another company. If the effectiveness of the proposed investment is higher than the actual one, then it may be worth switching to other companies that require investment.

The formula developed to calculate the standard value can also be used. Return on equity in this case is calculated using the average rate on bank deposits for the period (CD) and on income tax (SNP):

Krnk = Sd * (1-Snp).

When comparing the two indicators, it will immediately become clear how well the company is doing. But for a complete picture, it is necessary to analyze the efficiency of equity capital over several years so that temporary or permanent decline in profitability can be more accurately determined.

It is also necessary to take into account the degree of development of the company. If at the end of the period some innovations were introduced (for example, replacing equipment with more modern ones), then it is quite natural for there to be a slight decrease in profits. But in this case, profitability will certainly return to its previous level - and, possibly, become higher - in the shortest possible time.

About the norms

Each indicator has its own standard, including the efficiency of equity capital. If you focus on (for example, England and the USA), then the profitability should be in the range of 10-12%. For developing countries whose economies are subject to inflation, this percentage should be much higher.

You need to know that you should not always rely on return on equity, the formula for calculating which is presented at the beginning. The value may be overestimated, since the indicator is influenced by other financial levers. One of them is the value For such cases, there is a value that allows you to more accurately calculate profitability and the influence of certain factors on it.

Eventually

Every owner and investor should be aware of the formula discussed. Return on equity is a good assistant in any line of business. It is the calculations that will tell you when and where to invest your funds, as well as the right moment to withdraw them. This is very important information in the world of investment.

For owners and managers, this indicator gives a clear picture of the direction of activity. The results obtained can suggest exactly how to continue running the business: along the same path or change it radically. And making such decisions will ensure increased profits and greater stability in the market.

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2. Profit before tax – takes into account expenses (commercial, administrative and others) not taken into account in gross profit (line 140 of form No. 2).

Profit before tax is the basis for calculating profit tax (20% of profit before tax)

3. Net profit - (line 190 of form No. 2) the result of economic activities and the balance of additional funds of the enterprise after deductions to the budget of net profit - the basis for the formation of enterprise funds and for joint-stock enterprises - the calculation of dividend payments

4. Retained earnings – (470 line form No. 1) the value increases the amount of the enterprise’s equity capital for this year. It is defined as profit after settlements with shareholders and accrual from the material incentive fund, as well as loan payments, the due date of payment, which was in the corresponding period

Profitability is a relative indicator characterizing the ratio of profit and costs necessary to obtain it. Profitability characterizes the relative value of the enterprise's operating efficiency. Profitability is assessed using the following ratios:

1. How much net profit is generated for each ruble of products sold?

2. Overall profitability – characterizes the ratio of gross profit to sales revenue. It shows what result of production activities was obtained in each ruble of revenue

3. Return on equity

4. Economic profitability - characterizes the assessment of the production result in relation to each ruble invested in the assets of the enterprise.

Characterizes the efficiency of using all assets of the enterprise in the process of production activities

5. Capital return – characterizing the efficiency of use common funds enterprises (line 190)

6. Profitability of core activities - shows the ratio of gross profit to the amount of production costs incurred

7. Return on operating capital – characterizes the efficiency of capital

8. Economic growth sustainability coefficient - shows the rate at which equity capital increases due to financing of economic activities

Payback period of equity capital

Shows the number of years during which investments of equity capital in a specific enterprise pay off

Estimates the payback period based on the state of the enterprise’s economic activity for the current period.

Analysis of enterprise performance using DuPont models

The model proposed by DuPont represents a comprehensive assessment of the enterprise’s activities with the possibility of conducting factor analysis, i.e. determining the influence of each factor under consideration on the final result, the resulting indicator is the return on equity factor.

Financial risk – the possibility of losses (revenue, equity, profit) in conditions of economic uncertainty

Risk groups:

1. Dependent on the activities of the enterprise

2. Independent of the enterprise’s activities (market/systematic risks)

Types of risks:

1. Specific risks

a. The risk of a decrease in financial stability is caused by an imperfect capital structure, i.e. excessive use of borrowed funds with a high financial leverage ratio

b. The risk of insolvency is associated with the inability to pay contractual obligations within a certain period and is caused by the low liquidity of the enterprise’s assets (i.e. there are no funds in the current account)

c. Investment risk expresses the possibility of losses occurring during the investment process.

2. Components of the IR:

3. - risk of real investment

4. - risk financial investment or portfolio risk

5. - the risk of innovative investment is associated with the implementation of projects to introduce innovations

6. Risk associated with investing venture capital.

7. All of them are associated with a possible loss of capital of the enterprise and are included in the group of the most dangerous

a. Deposit risk reflects the possibility of non-return of deposits or non-repayment of certificates of deposit

b. Credit risk. Banking risk in a commercial enterprise manifests itself as:

8. - risk of non-payment for delivered products

9. - the risk of non-refund of advance payments in case of non-delivery of goods

2. Risks independent of the enterprise’s activities

a. Inflation risks, which are characterized by the possibility of depreciation of the real value of capital in the form of monetary assets, as well as the expected income and profit of the enterprise

a. Interest rate risk. It consists of an unexpected change in the interest rate on the financial market, both deposit and credit. The reason for this risk is changes in financial market conditions under the influence of government regulation. Since July 1, 2009, Central banks cannot independently change the government loan rate without the consent of the borrower.

Refinancing rate - the rate at which a financial bank finances commercial markets

b. Currency risk is associated with foreign economic activity and has 2 aspects:

Risk of choosing the type of currency

Currency fluctuation risk

These risks accompany financial losses during export-import operations

When the exchange rate depreciates, exporters bear losses, and when the exchange rate increases, importers bear losses.

c. Tax risk has a negative impact on financial results and has the following aspects:

Risk of introducing new types of payments

Risk of limiting existing payment rates

Risk of cancellation of tax benefits

Risk of changes in the conditions and timing of tax payments

d. Other types of risks

Risk of untimely execution of settlement and cash transactions

Risk of theft

Emission risk is associated with the fact that shares are sold on the open market at less than the planned share price

Financial risk management policy

The PUFR represents the general part of the organization's strategy to identify and prevent the consequences of risks.

Let's sort it out return on equity. In foreign sources, the return on equity ratio is designated as ROE – Return On Equity (or Return on shareholders’ Equity), and shows the share of net profit in the equity capital of the enterprise.

Let's start by determining the economic essence of the return on equity ratio, then we will give the calculation formula for both domestic and foreign forms financial statements and let’s not forget to talk about the standards for this indicator.

Return on equity. Economic essence of the indicator

Who needs this return on equity ratio?

This is one of the most important ratios used by investors and business owners, which shows how effectively the money invested in the enterprise was used.

The difference between return on equity (ROE) and return on assets (ROA) is that ROE does not show the performance of all assets (like ROA), but only those that belong to the owners of the enterprise.

How to use return on equity ratio?

As mentioned above, this indicator is used by investors and owners of an enterprise to evaluate their own investments in it. The higher the coefficient, the more profitable the investment. If the return on equity is less than zero, then there is reason to think about the feasibility and effectiveness of investment in the enterprise in the future. As a rule, the value of the coefficient is compared with alternative investments in shares of other enterprises, bonds and, in extreme cases, in a bank.

It is important to note that too high a value of the indicator can negatively affect the financial stability of the enterprise. Don't forget the main law of investment and business: more profitability - more risk.

Return on equity. Calculation formula for balance sheet and IFRS

The formula for the return on equity ratio consists of dividing the enterprise's net profit by its equity:

Return on Equity Ratio = Net Profit/Equity

For convenience, all profitability ratios are calculated as a percentage, so do not forget to multiply the resulting value by 100.

According to the domestic form of financial statements, this ratio will be calculated as follows:

Return on equity ratio = line 2400/line 1300

The data for the formula is taken from the “Profit and Loss Statement” and “Balance Sheet”. Previously, in the old form of financial statements (before 2011), the coefficient was calculated as follows:

Return on equity ratio = line 190/line 490

According to the IFRS system, the coefficient has the following form:

DuPont formula for calculating return on equity

To calculate the return on equity ratio, it is often used Dupont formula. It breaks the coefficient into three parts, the analysis of which allows you to better understand what influences the final coefficient to a greater extent. In other words, this is a three-factor analysis of the ROE ratio. Dupont's formula is as follows:

Return on equity ratio (Dupont formula) = (Net profit/Revenue) * (Revenue/Assets)* (Assets/Equity)

The Dupont formula was first used in financial analysis in the 20s of the last century. It was developed by the American chemical corporation DuPont. Return on equity (ROE) according to the DuPont formula is divided into 3 components: operating efficiency (return on sales),
efficiency of asset use (asset turnover),
leverage (financial leverage).

ROE (according to the DuPont formula) = Return on sales * Asset turnover * Leverage

In fact, if you reduce everything, you will get the formula described above, but such a three-factor separation of components allows you to better determine the relationships between them.

Return on equity ratio. Calculation example for KAMAZ OJSC

To assess return on equity, it is necessary to obtain the financial statements of the company under study. On the official website of the KAMAZ OJSC enterprise you can get financial data for the last 4 years. An alternative option is to use the InvestFunds service, which allows you to obtain data for several quarters and years. The figure below shows an example of importing balance data.

Calculation of the return on equity ratio for KAMAZ OJSC. Income Statement

Calculation of the return on equity ratio for KAMAZ OJSC. Balance sheet

Let's calculate the coefficients for 4 years:

Return on equity ratio 2010 = -763/70069 = -0.01 (-1%)
Return on equity ratio 2011 = 1788/78477 = 0.02 (2%)
Return on equity ratio 2012 = 5761/77091 = 0.07 (7%)
Return on equity ratio 2013 = 4456/80716 = 0.05 (5%)

There is an increase in the indicator from -1% to 5% over 4 years. However, investing in shares of this company is not advisable, because the profitability ratio is less than investing in alternative projects. For example, in 2013, the bank deposit rate was about 10%. It was more effective to invest free funds in a deposit than in KAMAZ OJSC (5%<10%).

Return on equity. Standard

The average ROE in the US and UK is 10-12%. For inflationary economies, the coefficient is higher. According to the international rating agency S&P, the return on equity ratio of Russian enterprises was 12% in 2010, the forecast for 2011 was 15%, for 2012 – 17%. Domestic economists believe that 20% is a normal value for return on equity.

The main criterion for assessing the return on equity ratio is to compare it with the alternative return that an investor can receive from investing in other projects. As discussed in the example above, investing in KAMAZ OJSC was not effective.

Analysis financial condition of an enterprise is one of the stages of assessment; it serves as the basis for understanding the true position of the enterprise and the degree of financial risks.

Under financial condition refers to the ability of an enterprise to finance its activities. It is characterized by the availability of financial resources necessary for the normal functioning of the enterprise, the feasibility of their placement and efficiency of use, financial relationships with other legal entities and individuals, solvency and financial stability.

The results of financial analysis directly influence the choice of valuation methods, forecasting the income and expenses of an enterprise, the determination of the discount rate used in the discounted cash flow method, and the value of the multiplier used in the comparative approach.

Analysis of the financial condition of an enterprise includes an analysis of balance sheets and reports on the financial results of the enterprise being assessed for past periods to identify trends in its activities and determine the main financial indicators.

Analysis of the financial condition of the enterprise involves the following stages:

Analysis of property status
Analysis of financial results
Financial analysis

1. Analysis of property status

During the operation of an enterprise, the value of assets and their structure undergo constant changes. The most general idea of the qualitative changes that have taken place in the structure of funds and their sources, as well as the dynamics of these changes, can be obtained using vertical and horizontal analysis of reporting.

Vertical analysis shows the structure of the enterprise's funds and their sources. Vertical analysis allows us to move to relative estimates and conduct economic comparisons of the economic indicators of enterprises that differ in the amount of resources used, to smooth out the impact of inflationary processes that distort the absolute indicators of financial statements.

Horizontal analysis reporting consists of constructing one or more analytical tables in which absolute indicators are supplemented by relative growth (decrease) rates. The degree of aggregation of indicators is determined by the analyst. As a rule, basic growth rates are taken over a number of years (adjacent periods), which makes it possible to analyze not only changes in individual indicators, but also to predict their values.

Horizontal and vertical analyzes complement each other. Therefore, in practice, it is not uncommon to build analytical tables that characterize both the structure of financial statements and the dynamics of its individual indicators. Both of these types of analysis are especially valuable for inter-farm comparisons, as they allow you to compare the reporting of enterprises that differ in type of activity and production volumes.

VERTICAL AND HORIZONTAL BALANCE ANALYSIS

Indicators	For the beginning of the year		At the end of the year		Changes (+, -)
Indicators	thousand roubles.	in % of total	thousand roubles.	in % of total	thousand roubles.	in specific gravity	in % of value
ASSETS
1. Fixed assets
2. Other non-current assets
3. Inventories and costs
4. Accounts receivable
5. Cash and other assets
Balance
PASSIVE
6. Capital and reserves
7. Long-term loans and borrowings
8. Short-term loans and borrowings
9. Accounts payable
Balance

2. Analysis of financial results

Profitability indicators are relative characteristics of the financial results and efficiency of an enterprise. They measure the profitability of an enterprise from various positions and are grouped in accordance with the interests of participants in the economic process and market volume. Profitability indicators are important characteristics of the factor environment for generating profit and income of enterprises.

The effectiveness and economic feasibility of the operation of an enterprise are measured by absolute and relative indicators: profit, level of gross income, profitability, etc. Using data from the profit and loss report (Form No. 2) and the consolidated balance sheet, we will calculate the main indicators of profitability.

Indicators	Brief Definition	Formula (line no. of balance sheet)
Return on sales	shows how much profit accrues per unit of products sold.	page 050/page 010 (F2)
Profitability of core activities	shows how much profit from sales falls on 1 ruble. costs.	page 050/(page 020+page 030+page 040) (F2)
Return on total capital	shows the efficiency of capital use. The dynamics of return on equity influences the dynamics of stock prices.	(p. 140-p. 150) (F.2)/(p. 300-p. 252-p. 244)
Return on equity		(p. 140-p. 150) (F.2)/(p. 490-p. 252-p. 244)
Payback period of equity capital	shows the number of years during which the investment in this organization will fully pay off.	(p. 490-p. 252-p. 244)/(p. 140-p. 150) (F.2)
Rate of return ROS	sales revenue is the ratio of net profit to gross sales	page 140(F2)/ page 010 (F2)
Return on Assets ROA	net profit / total assets	line 140(F2)/ (average value of assets (line 300n+ line 300k)/ 2)
Return on Equity ROE	net profit/equity.	p.140(F2)/ cf. led own funds - (sum of balance lines 490 at the beginning and end of the period): 2

The given indicators do not have standard values, depend on many factors and vary significantly among enterprises of different profiles, sizes, asset structures and sources of funds, therefore it is advisable to analyze trends in their changes over time.

3. Financial analysis

3.1. Assessing the dynamics and structure of balance sheet items

The financial condition of an enterprise is characterized by the placement and use of funds and sources of their formation.

For a general assessment of the dynamics of the financial condition, balance sheet items should be grouped into separate specific groups based on liquidity and maturity of liabilities (aggregated balance sheet). Based on the aggregated balance sheet, the structure of the enterprise's property is analyzed. Directly from the analytical balance sheet you can obtain a number of the most important characteristics of the financial condition of the enterprise, which are presented in the table below.

Characteristics of financial condition	Share in balance at xxx, in%	Changes in absolute values, in thousand rubles	Changes in relative values, in%
Total value of the organization’s property (line 300-line 252-line 244)
Cost of immobilized (non-current) funds (assets (p. 190)
Cost of mobile (working) funds (p. 290)
Cost of material working capital (p. 210)
The amount of the organization’s own funds (p. 490)
Amount of borrowed funds (line 590 + line 690)
Current own working capital (p. 490 - p. 252 - p. 244+ p. 590 - p. 190 - p. 230)
Amount of accounts receivable (line 230 + line 240)
Amount of accounts payable (p. 620)
Working capital (page 290 - page 690)

Dynamic analysis of these indicators allows us to determine their absolute increments and growth rates, which is important for characterizing the financial condition of the enterprise.

3.2. Analysis of liquidity and solvency of the balance sheet

The financial position of an enterprise can be assessed from the point of view of short-term and long-term prospects. In the first case, the criteria for assessing the financial position are the liquidity and solvency of the enterprise, i.e. the ability to timely and fully make payments on short-term obligations.

The task of analyzing balance sheet liquidity arises in connection with the need to assess the creditworthiness of the organization, i.e. its ability to timely and fully pay all its obligations.

Balance sheet liquidity is defined as the degree to which an organization's liabilities are covered by its assets, the period of conversion of which into money corresponds to the period of repayment of obligations. The liquidity of assets should be distinguished from balance sheet liquidity, which is defined as the temporary quantity necessary to convert them into cash. The shorter the time it takes for a given type of asset to turn into money, the higher its liquidity.

Solvency means that the enterprise has cash and cash equivalents sufficient to pay accounts payable requiring immediate repayment. Thus, the main signs of solvency are: a) the presence of sufficient funds in the current account; b) absence of overdue accounts payable.

It is obvious that liquidity and solvency are not identical to each other. Thus, liquidity ratios may characterize the financial position as satisfactory, but in essence this assessment may be erroneous if current assets have a significant share of illiquid assets and overdue receivables.

Depending on the degree of liquidity, i.e. rate of conversion into cash, the Company’s assets can be divided into the following groups:

A 1. The most liquid assets - these include all items of the enterprise's funds and short-term financial investments. This group is calculated as follows:

A 1 = page 250 + page 260

A 2. Quickly realizable assets - accounts receivable, payments for which are expected within 12 months after the reporting date:

A 2 = page 240

A 3. Slowly selling assets - items in Section II of the balance sheet asset, including inventories, value added tax, accounts receivable (payments for which are expected more than 12 months after the reporting date) and other current assets:

A 3 = page 210 + page 220 + page 230 + page 270

A 4. Hard-to-sell assets - articles in section I of the balance sheet asset - non-current assets:

A 4 = page 190

Balance sheet liabilities are grouped according to the degree of urgency of their payment.

P 1. The most urgent obligations - these include accounts payable:

P 1 = page 620

P 2. Short-term liabilities are short-term borrowed funds and other short-term liabilities:

P 2 = page 610 + page 660

P 3. Long-term liabilities are balance sheet items related to sections V and VI, i.e. long-term loans and borrowed funds, as well as debt to participants in the payment of income, deferred income and reserves for future expenses:

P 3 = page 590+ page 630 + page. 640 +pp. 650

P 4. Permanent liabilities or stable ones are articles in section IV of the balance sheet “Capital and reserves”. If the organization has losses, they are deducted:

P 4 = page 490

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 the following ratios exist:

A 1 > P 1; A 2 > P 2; A 3 > P 3; A 4 < P 4

If the first three inequalities are satisfied in a given system, then this entails the fulfillment of the fourth inequality, so it is important to compare the results of the first three groups for assets and liabilities.

In the case when one or more inequalities of the system have the opposite sign from that fixed in the optimal version, the liquidity of the balance sheet differs to a greater or lesser extent from the absolute value. At the same time, the lack of funds in one group of assets is compensated by their surplus in another group in the valuation; in a real situation, less liquid assets cannot replace more liquid ones.

Further comparison of liquid funds and liabilities allows us to calculate the following indicators:

Current liquidity of TL, which indicates the solvency (+) or insolvency (-) of the organization for the period of time closest to the moment in question:

TL = (A 1 + A 2) - (P 1 + P 2)

Prospective liquidity of LPs is a forecast of solvency based on a comparison of future receipts and payments:

PL = A 3 – P 3

The analysis of financial statements and balance sheet liquidity carried out according to the above scheme is approximate. A more detailed analysis of the financial indicators and ratios shown in the table below:

Indicators	Brief Definition	Calculation formula	Standard
General liquidity ratio	For a comprehensive assessment of the liquidity of the balance sheet as a whole, the general liquidity indicator should be used. Using this indicator, changes in the financial situation in the organization are assessed from the point of view of liquidity. This indicator is also used when choosing the most reliable partner from a variety of potential partners based on reporting.	L1=(A1+0.5A2+0.3A3)/(P1+0.5P2+0.3P3)	L1 > 1
Absolute liquidity ratio	It is the most stringent criterion for the liquidity of an enterprise: it shows what part of short-term borrowed obligations can, if necessary, be repaid immediately with cash. In domestic practice, the actual average values of this coefficient, as a rule, do not reach the standard value.	L2=page 260/page 690	L2 > 0,2-0,5
Quick ratio	The indicator is similar to the current ratio; however, it is calculated over a narrower range of current assets. This ratio shows the projected payment capabilities of the organization, subject to timely settlements with debtors. When analyzing the dynamics of this coefficient, it is necessary to pay attention to the factors that determined its change. Thus, if the increase in the quick liquidity ratio was mainly associated with an increase in unjustified accounts receivable, then this cannot characterize the activity of the enterprise from a positive side.	L3=(page 290-page 252-page 244-page 210-page 220-page 230)/page. 690	L3 > 1
Current ratio	Gives a general assessment of asset liquidity, showing how many rubles of current assets account for one ruble of current liabilities. The logic for calculating this indicator is that the company pays off short-term liabilities mainly at the expense of current assets; therefore, if current assets exceed current liabilities, the enterprise can be considered to be operating successfully (at least in theory). The value of the indicator can vary by industry and type of activity, and its reasonable growth in dynamics is usually considered as a favorable trend.	L4=(page 290-page 252-page 244-page 230)/page. 690	L4 > 2
Own funds ratio	Characterizes the availability of the enterprise's own working capital, necessary for its financial stability. The second of the standard coefficients, the value of which is less than 0.1, gives grounds for recognizing the structure of the enterprise's balance sheet as unsatisfactory and the enterprise as insolvent.	L5=(page 490-page 252-page 244+page 590-page 190-page 230)/(page 290-page 252-page 244-page 230)	L5 > 0,1
Solvency recovery ratio	It is calculated for a period of 6 months if at least one of the two ratios discussed above (equity coverage and current liquidity) is less than the standard value. It should be noted that the solvency restoration coefficient, which takes a value greater than 1, indicates a real opportunity for the enterprise to restore its solvency. If the coefficient takes a value less than 1, then this indicates that the enterprise does not have a real opportunity to restore solvency in the near future.	L6=(L4 con.lane+6/t(L4 con. lane-L4 beginning lane)/2	L6 > 1
Maneuverability coefficient of own working capital	Characterizes that part of own working capital that is in the form of cash, i.e. funds with absolute liquidity. For a normally functioning enterprise, this indicator usually varies from zero to one. All other things being equal, the growth of the indicator in dynamics is considered as a positive trend. An acceptable indicative value of the indicator is established by the enterprise independently and depends, for example, on how high the enterprise’s daily need for free cash resources is.	L7=page 260/(page 290-page 252-page 244-page 230-page 690)	L7 from 0 to 1
Share of working capital in assets	Characterizes the share of own working capital in the total amount of economic assets.	L8=(page 290-page 252-page 244-page 230)/(page 300-page 252-page 244)	L8 > 0,5
Inventory coverage ratio	It is calculated by correlating the amount of sources of inventory coverage and the amount of inventory. If the value of this indicator is less than one, then the current financial condition of the enterprise is considered unstable.	L9=(page 490 - page 252-page 244+page 590-page 190-page 230+page 610+page 621+page 622+page 627)/(page 210+page .220)	L9 > 1

3.3. Analysis of financial stability and capital structure

An assessment of the financial condition of an enterprise will be incomplete without an analysis of financial stability. When analyzing solvency, the state of liabilities is compared with the state of assets. The task of financial stability analysis is to assess the size and structure of assets and liabilities. Indicators that characterize independence for each element of assets and property as a whole make it possible to measure whether the analyzed organization is financially stable enough.

The financial stability of an economic entity should be understood as the provision of its reserves and costs with the sources of their formation. A detailed analysis of the financial condition of an organization can be carried out using absolute and relative indicators.

The simplest and most approximate way to assess financial stability is to observe the ratio:

Inventory (line 210+line 220)< Текущие оборотные средства (стр. 490 - стр. 252 -стр. 244+ стр. 590-стр. 190 -стр. 230)

This ratio shows that all inventories are fully covered by own working capital, i.e. the enterprise does not depend on external creditors. But such a situation cannot be considered normal, since it means that the administration either does not know how, or does not want, or does not have the opportunity to use external sources to carry out its core activities. Therefore, the following ratio is more fair:

Inventory (line 210+line 220)< Текущие оборотные средства (стр. 490 - стр. 252 -стр. 244+ стр. 590-стр. 190 -стр. 230)+Краткосрочные заемные средства (стр. 610)+Расчеты с кредиторами по товарным операциям (стр. 621+стр. 622+стр. 627)

This is the simplest and most approximate way to assess financial stability.

However, in addition to absolute indicators, financial stability is also characterized by relative coefficients, which are accepted in global and domestic accounting and analytical practice.

Indicators	Brief Definition	Formula (line no. of balance sheet)	Standard
Capitalization rate	Gives the most general assessment of the financial stability of the enterprise and indicates how much borrowed funds the organization raised per 1 ruble. own funds invested in assets. The growth of the indicator in dynamics indicates the increasing dependence of the enterprise on external investors and creditors, i.e. about some decrease in financial stability, and vice versa.	(p. 590+p. 690)/(p. 490- p. 252-p. 244)	U1<1,5
Financial Independence Ratio	or concentration of equity capital. Characterizes the share of the owners of the enterprise in the total amount of funds advanced for its activities. The higher the value of this coefficient, the more financially sound, stable and independent of external loans the enterprise is. An addition to this indicator is the concentration ratio of attracted (borrowed) capital - their sum is equal to 1 (or 100%).	(page 490 - page 252-page 244)/(page 300 - page 252-page 244)	U2 > 0,4-0,6
Debt capital concentration ratio	shows the share of borrowed capital in the total amount of sources of capital formation and reflects the tendency of the enterprise to depend on borrowed sources of capital formation. .	(p. 590+p. 690)/(p. 300 - p. 252 - p. 244)	U3? 0
Equity agility ratio	what part of the equity capital is in a mobile form, allowing relatively free maneuvering of capital.	(page 290-page 252-page 244-page 230-page 690)/(page 490-page 252-page 244)	U4 ~ 0.5
Financial stability ratio	shows the provision of current assets with long-term sources of formation.	(p. 490-p. 252-p. 244+p. 590)/(p. 300-p. 252-p. 244)	U5 > 1,0

A general indicator of financial independence is the surplus or shortage of sources of funds for the formation of reserves and costs, which is defined as the difference in the value of sources of funds and the value of reserves and costs:

The total amount of inventories and costs is equal to the sum of lines 210 and 220 of the balance sheet asset:

33 = page 210 + page 220

To characterize the sources of inventory formation and costs, several indicators are used that reflect different types of sources.

1. Availability of general own working capital (SOS):

SOS = page 490 – page 190

2. Availability of own and long-term borrowed sources of formation of reserves and costs or total operating capital (CF):

CF = page 490 + page 590 – page 190

3. The total value of the main sources of reserves and costs:

VI = page 490 + page 590 + page 610 – page 190

Three indicators of the availability of sources for the formation of reserves and costs correspond to three indicators of the provision of reserves and costs with sources of formation.

Indicators	Type of financial situation
	Absolute independence	Normal independence		Unstable state	Crisis state

Surplus (+) or deficiency (-) of own working capital (Fs)	Fs >0	Fs<0	Fs<0		Fs<0
Excess (+) or deficiency (-) of own and long-term borrowed sources of formation of reserves and costs (Ft)	ft >0	ft >0	Ft<0		Ft<0
Excess (+) or deficiency (-) of the total value of the main sources for the formation of reserves and costs (Fo)	Fo >0	Fo >0	Fo >0		Fo<0

It is possible to distinguish 4 types of financial situations:

1. Absolute independence of financial condition. This type of situation is extremely rare and represents an extreme type of financial stability.

2. Normal independence of financial condition, which guarantees solvency.

3. Unstable financial condition, associated with a violation of solvency, but in which it is still possible to restore balance by replenishing sources of own funds, by reducing accounts receivable, accelerating inventory turnover.

4. Crisis financial condition, in which the enterprise is completely dependent on borrowed sources of financing. Own capital, long-term and short-term credits and borrowings are not enough to finance working capital, that is, replenishment of inventories comes from funds generated as a result of the slowdown in repayment of accounts payable.

To be continued …

The payback period of equity capital is the most common time indicator, primarily of interest to owners and third-party interests. There is no single criterion for the values of the indicator, since this indicator depends on the constantly changing values of equity and profit. In Grand Service LLC, the payback period ratio for equity capital in 2008 increased compared to 2007.

Analysis of liquidity and solvency of Grand Service LLC

One of the most important characteristics of the financial condition of an enterprise is its solvency, which refers to the ability of a commercial organization to pay its obligations.

The solvency of an enterprise is determined by the availability of means of payment for timely settlements with suppliers, employees, financial and tax authorities, banks and other counterparties.

Let's calculate the relative indicators of liquidity and solvency of the analyzed enterprise and compare the obtained values with the standard ones.

Table 1.10 - Relative indicators of liquidity and solvency of Grand Service LLC for 2007-2008.

Indicator name	Calculation formula	Settlement at Grand Service LLC	Standard	Deviation from the standard


Current ratio	(290-230) / (690-640)
Quick ratio (critical assessment)	(240+250+260) / (690-640)
Absolute liquidity ratio	(250+260) / (690-640)
Coverage ratio of current assets with equity capital (coverage ratio SOS)
Return on sales, Rp	Рп = line 050/(line 020+line 030+line 040)*100%		1-5%-low-rent; 5-20% - average rent; 20-30% - high-rent.
Return on equity, Rcap	Rcap = page 190 (F-2) / page 490 (F-1)*100%