If financial analysis is the primary stage of working with information about the object of assessment, then the analysis of financial ratios (ratio method) acts as the basis for the financial analysis itself. The advantages of using it are the full availability of the initial data and the informativeness of the resulting coefficients. Among the disadvantages of the method, one should note the calculation and in-depth analysis of very large number coefficients
Due to the lack of a generally accepted classification of financial ratios, they are more often divided into classes according to the sides of the characteristic financial condition. For example, on indicators of solvency or liquidity, financial stability, profitability, business activity. They can also be classified according to the group of persons using them (owners, managers, investors, creditors, etc.).
The main advantages of financial ratios are simplicity of calculations and elimination of the influence of inflation, which is especially important when analyzing in the long term.
IN general view The sequence of analyzing the financial condition of an enterprise may be as follows:
1) assessment of the property status and capital structure;
2) analysis of liquidity and financial stability;
3) turnover analysis;
4) analysis of the effectiveness of financial investments.
It is advisable to begin the analysis of the property status by finding out what capital the enterprise has. For this purpose, you should consider the indicators of the liability balance: total, equity and borrowed capital. Then the correct investment of funds in the assets of the enterprise is checked. During the operation of an enterprise, the size of assets and their structure undergo constant changes. Methods of vertical and horizontal analysis are designed to identify changes that have taken place in the structure of funds and their sources.
The task of analyzing the liquidity and solvency of an enterprise is to assess the creditworthiness, that is, the ability of the enterprise to fulfill its obligations. It is determined by the ratio of the amount of debt and liquid funds, that is, funds that can be used to pay off debts (cash, deposit, securities, sellable items working capital and etc.).
The liquidity of an enterprise can be quickly assessed using liquidity ratios.
In Appendix 2 we present the main financial ratios used to assess the liquidity and solvency of an enterprise.
One of the characteristics of a stable position of an enterprise is its financial stability. The financial stability of an enterprise should be understood as its independence from external sources of financing.
The stable financial position of an enterprise is the result of skillful management of the entire set of production and economic factors that determine the results of the enterprise. Financial stability is determined both by the stability of the economic environment within which the enterprise operates, and by the results of its functioning, its active and effective response to changes in internal and external factors.
The main task of the analysis financial stability enterprise is to assess the degree of independence from borrowed sources of financing. In the process of analysis, it is necessary to provide answers to the questions: how independent is the enterprise from a financial point of view, is the level of this independence increasing or decreasing, and does the state of its assets and liabilities meet the objectives of its financial- economic activity.
IN classical theory analysis of financial statements, financial stability is understood as such a ratio of assets and liabilities of an enterprise that guarantees a certain level of risk of insolvency of the enterprise. Thus, as indicators of financial stability, coefficients characterizing the structure of assets and liabilities of the balance sheet, as well as the relationship between individual items of assets and liabilities, can be used.
When the financial stability of an enterprise is analyzed as of a certain date, the degree of rationality in managing its finances over a certain period and that date is revealed. Insufficient financial stability leads to a lack of funds for production, and excessive financial stability burdens the organization with reserves of resources and slows down its development. Therefore, financial stability is the correct distribution and use of financial resources in accordance with market requirements and the needs of the enterprise.
The financial position of an enterprise is considered stable if it covers with its own funds at least half of the financial resources necessary for normal business activities, effectively uses financial resources, maintains financial, credit and accounting discipline, in other words, is solvent.
Appendix 3 presents the main financial ratios used to assess the financial stability of an enterprise.
Analysis of the business activity of an enterprise is an analysis of the effectiveness of current activities, that is, the efficiency of the use of capital. In the financial aspect, business activity is revealed primarily in the rate of turnover of the organization’s funds. To analyze the business activity of a company, you need to study the level and dynamics different indicators turnover - coefficients.
The business activity of an organization with a commercial focus can be measured using a set of qualitative and quantitative indicators. Business activity ratios - important criteria rational use of funds by the enterprise.
The breadth of sales markets, both internal and external, the business reputation of the company, the presence of long-term partnerships with suppliers and clients, good competitiveness constitute a group of qualitative criteria for the business activity of an enterprise. They can be compared with similar indicators among competitors. In this case, the source of data is not financial statements, but information from marketing research.
For quantitative criteria of a company's business activity, the presence of relative and absolute data is inherent. Absolute indicators include: sales volumes of finished products, provision of services; the amount of capital and assets employed, including profits and equity.
In practice, the obtained quantitative indicators should be compared retrospectively over several quarters or years, studying their dynamics. In this case, a relationship between them is revealed, best of all if it is expressed by the formula: rate of increase in net profit > rate of increase in revenue from product sales > rate of increase in asset value > 100%.
This means that the company's profit should grow faster than all other indicators of business activity. At the same time, expenses are reduced and assets are mobilized. But even the most successful enterprises do not always achieve this ratio. This may be prevented by the release of new products, modernization of equipment and introduction of new technologies, changes in the management structure, and much more. etc.
The function of relative indicators of an enterprise's business activity is to reflect the efficiency of using its resources. This group mainly includes turnover indicators and financial ratios. To find the average value of indicators, half the sum of indicators at the end and beginning of the reporting period or the average chronological value for the period is calculated, taking into account the available data.
To express the coefficients, conventional units are used - times, and to reflect the duration of turnover - days. These indicators have special meaning for organizations. Firstly, the rate of turnover affects the volume of annual turnover. Secondly, the amount of costs depends on the speed of turnover; fast turnover rates guarantee savings from reducing production (circulation) costs. Thirdly, the accelerated pace of one part of the circuit has a positive effect on the dynamics of funds in its other parts (stages). The faster assets are converted into real money, the better the financial condition of the enterprise.
The level of a company's business activity is characterized by the parameters of equity turnover and assets turnover. It is defined as the ratio of revenue from sales of products and services for the year and the average value of equity capital and assets for this period.
It is important to compare business activity indicators with the average standards for these parameters in the industry.
Analysis of an enterprise's business activity is based on the study of two groups of parameters: asset management indicators and turnover indicators in general.
To assess the turnover of funds that were invested in the organization’s property, you can resort to assessing individual quantities: the turnover rate and the turnover period. The first indicator is characterized by the number of turnover of capital and its components for a certain period. The turnover period is usually understood as the average length of time when funds previously invested in production and commercial activities are returned to the company’s economic activities.
Appendix 4 presents an algorithm for calculating business activity indicators.
The terms “profit” and “financial results” are often used in accounting practice, in the work tax authorities, when conducting a comprehensive economic analysis of the activities of organizations, in financial management, when carrying out financial and investment analysis. Let us consider the content of these concepts in more detail.
The usefulness of the enterprise and the effectiveness of its activities are expressed in a positive financial result.
Economists and analysts in their research always pay great attention to the study of the financial results of the main activities of enterprises, but at the same time they consider this category from different points of view and with varying degrees of specificity.
So, A.D. Sheremet and R.S. Saifulin proposed their own methodology for analyzing the profitability and financial results of an enterprise and point out that the expression of the financial result is “the change in the value of the equity capital of the reporting period.” It is also worth noting that this definition corresponds to the definition of revenue under IFRS. The authors consider the following to be the most important indicators of financial results:
Profit (loss) from sales;
Profit (loss) from financial and economic activities;
Profit (loss) of the reporting year;
Retained earnings (uncovered loss) of the reporting period.
According to Kovalev V.V. the financial result should be considered as the profit of the organization, which, ultimately, can only be controlled by the business owners. While in world practice the financial result is mainly an increase in the company’s net assets. According to G.V. Savitskaya’s financial result is the totality of the enterprise’s profit and its level of profitability. And profit acts as net income, which remains at the disposal of the company’s management after the sale of goods. Also G.V. Savitskaya draws attention to such parameters as taxable and net profit, balance sheet (total) profit. “Balance sheet profit includes financial results from the sale of products, works and services, from other sales, income and expenses from non-sales operations.” But the taxable profit is the difference between the total profit and the profit that is subject to income tax and the amount of income tax benefits.
Professor I.A. Blank considers balance sheet profit to be one of the most important indicators of an enterprise’s financial performance.” He believes that it includes: operating profit or profit from the sale of goods, provision of services, as well as from the sale of property. He also includes profits from non-operating activities here, if the dominant role of operating profit remains, which accounts for 90-95% of the total profit.
Scientists also differ in their opinions regarding the content and stages of analyzing financial results when assessing the functioning of an organization.
G.V. Savitskaya was asked to carry out analytical procedures step by step, examining:
Structure and content, dynamics of balance sheet profit, implementation of the plan for the reporting period (year);
Structure and content, dynamics of profit from product sales, its connection with the company’s assortment policy;
Conditions that affect the profit of the enterprise as a whole;
Structure and content, dynamics of non-operating profit, implementation of the plan for the reporting period (year);
Profitability of the enterprise, in particular return on capital and its components, profitability of sales;
Conditions that affect overall profitability and its individual components: return on sales by type of product, return on total capital;
A methodological basis for finding resources to increase profitability and profitability.
Let's move on to considering the profitability indicators of the enterprise (Table 1). Thus, the most indicative and often used in practice are the following: the overall profitability of the enterprise and the return on equity of the enterprise. The first indicator characterizes the economic profitability of all funds advanced to enterprises, and equal to the ratio net profit to the entire balance sheet total.
Thus, the main purpose of analyzing the financial condition of an enterprise is the timely identification and elimination of shortcomings in financial activities, finding reserves for improving the financial condition of the enterprise. Financial condition is characterized by the availability of financial resources necessary for the normal functioning of the enterprise, their appropriate placement and effective use. And also - financial relationships with other legal entities and individuals, payment and creditworthiness, financial stability.
Table 1. Algorithm for calculating profitability indicators
|
Index |
Calculation formula |
Economic sense |
|
1. Return on assets |
Ra= PRdn/VB*100% where PRdn is profit before tax, rub.; VB - balance sheet currency, rub. |
Characterizes the efficiency of use of all property of the enterprise (regardless of sources of financing) |
|
2. Return on equity |
Rsk = (PE / SZSK)*100% where Rsk is return on equity, %; PE - net profit, rub.; SZSK - average annual value of equity capital, rub. |
Shows the profit that owners receive from a ruble of invested funds |
|
3. Profitability of sales |
Rpr = (PR / BP)*100% where Rpr - return on sales based on sales profit, %; PR - profit from sales, rub.; VR - sales revenue, rub. |
Shows the profit a company receives from each product sold |
|
4. Profitability of core activities |
Rrp = (PR / PSRP)*100%, where Ррп - profitability of products sold, %; PR - profit from sales, rub.; PSRP - total cost of products sold, rub. |
Characterizes the profitability of the ruble of the total cost |
The main indicators that characterize the financial condition of the enterprise are: liquidity and financial stability ratios; turnover indicators; capital productivity ratio; profitability. The main source of information for assessing the financial condition of an enterprise is financial reporting.
One of the most important characteristics of the financial condition of an enterprise is the stability of its activities in the light of a long-term perspective. It is related to the overall financial structure of the enterprise, the degree of its dependence on creditors and investors. Financial stability is a certain state of the company’s accounts, guaranteeing its constant solvency. As a result of any business transaction, the financial condition of the enterprise may remain unchanged, or improve, or worsen. Flow business transactions committed daily is, as it were, a “disturber” of a certain state of financial stability, the reason for the transition from one type of stability to another. Knowing the limits of changes in the sources of funds to cover capital investments in fixed assets or inventories allows one to generate such flows of business transactions that lead to an improvement in the financial condition of the enterprise and an increase in its sustainability.
We will diagnose the crisis state of the enterprise Ramix LLC for 3 years using indicators based on balance sheet(Appendix No. 1,2,3).
Let's structure the active and passive parts of the balance sheet (according to Table 1) and find indicators of financial and economic stability of the enterprise (I), absolute solvency (I") And financial security (I"") , and then we will conclude how stable the financial and economic condition of this enterprise is.
Each indicator has four groups of enterprise status:
Indicator of financial and economic stability:
1. Super stability state
NMFA< И < ФА
- 2. State of sufficient stability
- 3. State of financial and economic stability
- 4. State of risk
LNA< И к < НА
Solvency indicator:
- 1. State of absolute solvency
- 2. State of guaranteed solvency
- 3. Potential solvency
NMFA< И" к < НМЛА
4. Loss of solvency
NMLA< И" к < НМА
Security indicator
1. State of independence
NMLA< И"" < ЛА
2. State of reliability
LNA< И"" < НМЛА
- 3 State of relative security
- 4. State of risk
- 1) Structuring the active and passive parts of the balance sheet for 2004 (see Appendix 1):
Table 3. Structuring of the active and passive parts of the balance sheet of Ramix LLC for 2004 (thousand rubles)
Conclusion: In 2004, all financial and economic indicators increased. During this year, there was an increase in equity capital, while borrowed capital, on the contrary, decreased. The complex of property used in production has increased, that is, from 563,471 tr. up to 673019 tr. Most of the FA moved to MFA, there was an increase Money and short-term financial investments by approximately 148%, from 162,785 tr. up to 242048 tr.
And a smaller part of the FA moved to the NMFA and they declined. NMLA decreased from 627,597 tr. to 614,799 TR, because there was a decrease in NMFA due to short-term receivables, although inventories increased. By the end of the year, there was also an increase in aircraft from 790,382 tr. up to 856847 tr. due to the fact that there has been a large increase in MFA. Borrowed capital has decreased, namely long-term loans and credits, accounts payable, and this has a very positive effect on the financial policy of the enterprise.
In general, the enterprise at the end of the reporting period was quite stable, absolutely solvent and in a state of independence. It can cover all its obligations solely from financial resources, without resorting to the use of its immobile sources and to the sale of non-current assets, that is, its own property.
According to the characteristics of the ranks of the complex differentiated dynamic scale of the financial and economic condition of Ramix LLC in 2004, it can be characterized as rank 4.
At the end of the reporting period, the Ramix enterprise was in the super-sustainability zone, into which it moved from the zone of sufficient stability. This transition is ensured by the necessary and sufficient positive increase in the indicator of financial and economic stability (?I = 6361 tr.). Such dynamics of the effectiveness of financial stability are highly assessed.
The enterprise has acquired absolute solvency and, from a security point of view, independence, since its obligations are now fully secured by mobile means of payment (cash, letters of credit, deposit accounts) and, in addition, there is a sufficient reserve of liquid assets. The condition called net lending has intensified. In order to stay within the boundaries of super-sustainability, one should not allow, other things being equal, a decrease in the amount of equity capital achieved at the end of the reporting period by more than 429,958 tr.
2) Structuring the active and passive parts of the balance sheet for 2005 (see Appendix 2):
Table 5. Structuring of the active and passive parts of the balance sheet of Ramix LLC for 2005 (thousand rubles)
Table 6. Table of indicators of Ramix LLC for 2005 (thousand rubles)
|
Indicator |
Beginning of the year |
Financial analysis at an enterprise is needed for an objective assessment of the economic and financial condition in periods of past, present and projected future activity. To identify weak production areas, areas of problems, and identify strong factors that management can rely on, the main financial indicators are calculated.
An objective assessment of a company’s position in terms of economics and finances is based on financial ratios, which are a manifestation of the relationship between individual accounting data. The goal of financial analysis is to achieve the solution of a selected set of analytical problems, that is, a specific analysis of all primary sources of accounting, management and economic reporting.
Main goals of economic and financial analysis
If the analysis of the main financial indicators of an enterprise is considered as identifying the true state of affairs in the enterprise, then the results will provide answers to the following questions:
- the company’s ability to invest funds in investing in new projects;
- the current progress of affairs in relation to material and other assets and liabilities;
- the state of loans and the company’s ability to repay them;
- the existence of reserves to prevent bankruptcy;
- identifying prospects for further financial activities;
- assessment of the enterprise in terms of value for sale or re-equipment;
- tracking the dynamic growth or decline of economic or financial activities;
- identifying reasons that negatively affect business results and finding ways out of the situation;
- consideration and comparison of income and expenses, identification of net and total profit from sales;
- studying the dynamics of income for basic goods and in general from all sales;
- determining the portion of income used to reimburse costs, taxes and interest;
- studying the reasons for the deviation of the amount of balance sheet profit from the amount of sales income;
- study of profitability and reserves to increase it;
- determining the degree of compliance of the enterprise's own funds, assets, liabilities and the amount of borrowed capital.
Stakeholders
An analysis of the company's main financial indicators is carried out with the participation of various economic representatives of departments interested in obtaining the most reliable information about the affairs of the enterprise:
- internal subjects include shareholders, managers, founders, audit or liquidation commissions;
- external ones are represented by creditors, audit firms, investors and government officials.
Financial analysis capabilities
The initiators of the analysis of the enterprise’s work are not only its representatives, but also employees of other organizations interested in determining the actual creditworthiness and the possibility of investing in the development of new projects. For example, bank auditors are interested in the liquidity of a firm's assets or its current ability to pay its bills. Legal and individuals Those wishing to invest in the development fund of a given enterprise try to understand the degree of profitability and risks of the investment. An assessment of key financial indicators using a special technique predicts the bankruptcy of an institution or indicates its stable development.
Internal and external financial analysis
Financial analysis is part of the general economic analysis of the enterprise and, accordingly, part of a complete economic audit. Full analysis is divided into internal management and external financial audit. This division is due to two practically established systems in accounting - management and financial accounting. The division is considered conditional, since in practice external and internal analysis complement each other with information and are logically interrelated. There are two main differences between them:
- by accessibility and breadth of the information field used;
- degree of application of analytical methods and procedures.
An internal analysis of key financial indicators is carried out to obtain summarized information within the enterprise, determine the results of the last reporting period, identify free resources for reconstruction or re-equipment, etc. To obtain results, all available indicators are used, which are also applicable when researched by external analysts.
External financial analysis is performed by independent auditors, outside analysts who do not have access to the internal results and indicators of the company. External audit methods assume some limitation of the information field. Regardless of the type of audit, its methods and methods are always the same. What is common in external and internal analysis is the derivation, generalization and detailed study of financial ratios. These basic financial indicators of the enterprise’s activities provide answers to all questions regarding the work and prosperity of the institution.
Four main indicators of financial health
The main requirement for the break-even operation of an enterprise in conditions market relations is economic and other activities that ensure profitability and profitability. Economic activities are aimed at reimbursing expenses with income received, generating profit to satisfy the economic and social needs of team members and the material interests of the owner. There are many indicators to characterize activities, in particular these include gross income, turnover, profitability, profit, costs, taxes and other characteristics. For all types of enterprises, the main financial indicators of the organization’s activities are highlighted:
- financial stability;
- liquidity;
- profitability;
- business activity.
Financial stability indicator
This indicator characterizes the degree of correlation between the organization’s own funds and borrowed capital, in particular, how much borrowed funds account for 1 ruble of money invested in tangible assets. If such an indicator when calculated is obtained with a value of more than 0.7, then the financial position of the company is unstable, the activity of the enterprise to some extent depends on attracting external borrowed funds.
Liquidity characteristics
This parameter indicates the main financial indicators of the company and characterizes the sufficiency of the organization’s current assets to pay off its own short-term debts. It is calculated as the ratio of the value of current current assets to the value of current passive liabilities. The liquidity indicator indicates the possibility of converting the company's assets and values into cash capital and shows the degree of mobility of such transformation. The liquidity of an enterprise is determined from two perspectives:
- the length of time required to convert current assets into cash;
- the ability to sell assets at a specified price.
To identify the true indicator of liquidity in an enterprise, the dynamics of the indicator are taken into account, which allows not only to determine the financial strength of the company or its insolvency, but also to identify the critical state of the organization’s finances. Sometimes the liquidity ratio is low due to the increased demand for the industry's products. Such an organization is completely liquid and has a high degree of solvency, since its capital consists of cash and short-term loans. The dynamics of the main financial indicators demonstrate that the situation looks worse if the organization has working capital only in the form large quantity warehoused products in the form of current assets. To turn them into capital, a certain amount of time is required for implementation and the presence of a customer base.
The main financial indicators of the enterprise, which include liquidity, show the state of solvency. The company's current assets must be sufficient to repay current short-term loans. IN best position these values are approximately at the same level. If an enterprise has much more working capital in value than short-term loans, then this indicates an ineffective investment of money by the enterprise in current assets. If the amount of working capital is lower than the cost of short-term loans, this indicates the imminent bankruptcy of the company.
As a special case, there is an indicator of quick current liquidity. It is expressed in the ability to pay off short-term liabilities using the liquid portion of assets, which is calculated as the difference between the entire working portion and short-term liabilities. International standards determine the optimal level of the coefficient in the range of 0.7-0.8. The presence of a sufficient number of liquid assets or net working capital within an enterprise attracts creditors and investors to invest money in the development of the enterprise.
Profitability indicator
The main financial indicators of an organization's effectiveness include the value of profitability, which determines the efficiency of using the funds of the company's owners and generally shows how profitable the operation of the enterprise is. The profitability value is the main criterion for determining the level of stock exchange quotes. To calculate the indicator, the amount of net profit is divided by the amount of average profit from the sale of the company's net assets for the selected period. The indicator reveals how much net profit each unit of goods sold brought.
The generated income ratio is used to compare the income of the desired enterprise in comparison with the same indicator of another company operating under a different taxation system. The calculation of the main financial indicators of this group provides for the ratio of profit received before taxes and due interest to the assets of the enterprise. As a result, information appears about how much profit each monetary unit invested in the company’s assets brought in for work.
Business activity indicator
Characterizes how much finance is obtained from the sale of each monetary unit certain type assets and shows the turnover rate of the organization's financial and material resources. For the calculation, the ratio of net profit for the selected period to the average cost of costs in material terms, money and short-term securities is taken.
There is no standard limit for this indicator, but the management forces of the company strive to accelerate turnover. The constant use of loans from outside in economic activity indicates insufficient financial receipts as a result of sales, which do not cover production costs. If the value of current assets on the organization's balance sheet is overstated, this results in the payment of additional taxes and interest on bank loans, which leads to loss of profit. A low number of active funds leads to delays in fulfilling production plans and the loss of profitable commercial projects.
For an objective, visual examination of economic activity indicators, special tables are compiled that show the main financial indicators. The table contains the main characteristics of work for all parameters of financial analysis:
- inventory turnover ratio;
- indicator of the company's receivables turnover over time;
- value of capital productivity;
- resource return indicator.
Inventory turnover ratio
Shows the ratio of revenue from the sale of goods to the amount in monetary terms of inventories at the enterprise. The value characterizes the speed of sale of material and commodity resources classified as a warehouse. An increase in the ratio indicates a strengthening of the organization’s financial position. The positive dynamics of the indicator is especially important in conditions of large accounts payable.
Accounts receivable turnover ratio
This ratio is not considered as the main financial indicators, but is an important characteristic. It shows the average time period in which the company expects payment to be received after the sale of goods. The calculation is based on the ratio of accounts receivable to average daily sales revenue. The average is obtained by dividing the total revenue for the year by 360 days.
The resulting value characterizes the contractual terms of work with customers. If the indicator is high, it means that the partner provides preferential working conditions, but this causes caution among subsequent investors and creditors. Small value indicator leads, in market conditions, to a revision of the contract with this partner. An option for obtaining the indicator is a relative calculation, which is taken as the ratio of sales revenue to the company's receivables. An increase in the ratio indicates a low debtor debt and high demand for products.
Capital productivity value
The main financial indicators of the enterprise are most fully complemented by the capital productivity indicator, which characterizes the rate of turnover of finance spent on the acquisition of fixed assets. The calculation takes into account the ratio of revenue from goods sold to the annual average cost of fixed assets. An increase in the indicator indicates a low cost of expenses in terms of fixed assets (machines, equipment, buildings) and a high volume of goods sold. Great importance capital productivity indicates insignificant production costs, and low capital productivity indicates inefficient use of assets.
Resource efficiency ratio
For the most complete understanding of how the main financial indicators of an organization’s activities develop, there is an equally important resource return ratio. It shows the degree of efficiency of the enterprise’s use of all assets on the balance sheet, regardless of the method of acquisition and receipt, namely, how much revenue is received for each monetary unit of fixed and current assets. The indicator depends on the procedure for calculating depreciation adopted at the enterprise and reveals the degree of illiquid assets that are disposed of to increase the ratio.
Main financial indicators of LLC
Income source management ratios show the financial structure and characterize the protection of the interests of investors who have made long-term injections of assets into the development of the organization. They reflect the company's ability to repay long-term loans and credits:
- share of loans in the total amount of financial sources;
- ownership ratio;
- capitalization ratio;
- coverage ratio.
The main financial indicators are characterized by the volume of borrowed capital in the total mass of financial sources. The leverage ratio measures the specific amounts of assets purchased with borrowed money, which includes the firm's long-term and short-term financial liabilities.
The ownership ratio supplements the main financial indicators of the enterprise by characterizing the share of equity capital spent on the acquisition of assets and fixed assets. A guarantee of obtaining loans and investing investor money in a project for the development and re-equipment of an enterprise is the indicator of the share of own funds spent on assets in the amount of 60%. This level is an indicator of the stability of the organization and protects it from losses during a downturn in business activity.
The capitalization ratio determines the proportional relationship between borrowed funds from various sources. To determine the proportion between equity and borrowed finance, the inverse leverage ratio is used.
The interest coverage indicator or coverage indicator characterizes the protection of all types of creditors from non-payment of interest rates. This ratio is calculated as the ratio of the amount of profit before interest to the amount of money intended to pay off interest. The indicator shows how much money the company earned to pay borrowed interest during the selected period.
Market activity indicator
The main financial indicators of the organization in terms of market activity indicate the position of the enterprise in the securities market and allow managers to judge the attitude of creditors towards general activities company for the past period and in the future. The indicator is considered as the ratio of the initial book value of a share, the income received on it and the prevailing market price at a given time. If all other financial indicators are within the acceptable range, then the market activity indicator will also be normal if the market value of the stock is high.
In conclusion, it should be noted that financial analysis economic structure organization is important for all stakeholders, shareholders, short-term and long-term creditors, founders and management.
Financial indicators(financial indicators) – cost indicators used to characterize economic units (state, region, enterprise, etc.).
Financial indicators are divided into absolute and relative, and are also classified (with some degree of convention) into macroeconomic and microeconomic. In turn, within each group, separate subgroups are distinguished.
Macroeconomic financial indicators:
- general economic ( , );
- budgetary (revenues, expenses, budget deficit, public debt);
- indicators of financial markets (interest rates, monetary aggregates, exchange rates, central banks);
- indicators of the balance of payments (balance of payments for current transactions, balance of capital flows, gold and foreign exchange reserves).
Microeconomic financial indicators:
- volume of sales;
- inventories;
- profit;
- earnings per share;
- price/earnings;
- book value of the share;
- stock price;
- current stock return;
- return on equity;
- return on assets and borrowed funds;
- coverage ratio.
In developed countries, in particular in the USA, the following macroeconomic financial indicators are most common:
- CCI – Consumer Confidence Index - CB consumer confidence;
- CPI – Consumer Price Index – Consumer Price Index (CPI);
- Unemployment Rate – Unemployment rate (USA);
- FOMC Meeting (Interest Rate Decision) – Federal Committee meeting open market FOMC (Interest Rate Announcement);
- GDP – Gross Domestic Product – Gross Domestic Product (GDP);
- ISM (Institute for Supply Management) Manufacturing Index – Index of Manufacturing Activity;
- MCSI (Michigan Consumer Confidence Index) - University of Michigan Consumer Sentiment Index;
- NFP (Changes in non-farm payrolls) – Change in the number of employees in the non-farm sector;
- Manufacturing PMI (Purchasing Managers Index) – PMI manufacturing activity index;
- Retail Sales Data – Retail sales data;
- Tankan Large Manufacturers Index – Tankan Manufacturing Index;
- TIC Net Long-Term Transactions – Volume of purchases of long-term TIC securities;
- Trade Balance - Trade balance.
CCI – Consumer Confidence Index - Consumer Confidence CB
Published on the last Tuesday of each month at 14:00 GMT, covering data for the current month.
The Consumer Confidence Index measures the level of consumer confidence in economic activity. To calculate the index, survey data from about 5 thousand households is taken. When the state guarantees us more jobs, increased wages and lower interest rates, our confidence and purchasing power increase. The respondents answer questions about their income, assessments of the state of the market and the possibility of increasing their financial well-being. The Federal Reserve takes this figure into account when setting interest rates. This index is considered an important market driver because... private consumption accounts for two-thirds of the American economy. An increase in the index value is a positive factor for the development of the national economy and leads to the growth of the national currency.
CPI – Consumer Price Index – Consumer Price Index (CPI)
is a benchmark index designed to measure the average level of prices of goods and services (the consumer basket) over a specified period in the economy, usually monthly (not including taxes). This is a key way to measure changes in purchasing trends and . An increase in the CPI indicates inflation.
Core-CPI - US CPI (Consumer Price Index excluding food and energy, expenses that vary seasonally) provides a more accurate measure of overall price. Published approximately on the 20th of each month at 13:30 GMT. This index is widely used in economics and is considered an important market driver.
Unemployment Rate – Unemployment rate (USA)
Issued by the Bureau of Labor Statistics on the first Friday of each month at 13:30 GMT, covering data from the previous month. The unemployment rate measures the percentage of the total labor force that is unemployed but actively seeking work and available to work in the United States. The report is the first part of the overall US Employment Situation Report. The second part of the report talks about the length of the working week and average hourly wages.
FOMC Meeting (Interest Rate Decision) – Meeting of the Federal Open Market Committee FOMC (Interest Rate Announcement)
Interest Rate Announcement. Meetings of representatives of the US Federal Bank are held 8 times a year. The interest rate decision is published during each meeting (around 19:15 GMT).
(US Federal Reserve) is responsible for managing US monetary policy. This system controls banks, provides services to government organizations and citizens, and maintains financial stability in the country.
In the United States, there are 12 authorized regions (each of which includes several states) represented on the Federal Reserve Committee.
The interest rate of currencies is practically the price of money. The higher interest rate on a currency, the more people will tend to hold that currency in order to buy it and thus strengthen the exchange rate. This is a very important indicator that affects the inflation rate and is a serious driver of the market.
GDP – Gross Domestic Product – Gross Domestic Product (GDP)
is a gross indicator of market activity. It represents the monetary value of all goods and services produced in an economy during a given period. Includes consumption, government purchases, investment and trade balance.
GDP is perhaps the most important indicator of a country's economic health. It is usually measured on an annual basis, but quarterly statistics are also available. The quarterly dynamics of percentage of GDP shows the growth rate of the economy as a whole.
The US Department of Commerce publishes GDP in 3 modes: initial, preliminary, final. The release of the “Initial Report” appears on the last day of each quarter. A “Preliminary Report” follows within a month, followed by a “Final Report” issued a month later. The latest GDP data has relatively high implications for markets. GDP shows the rate at which a country's economy is growing (or shrinking).
The US GDP report is released on the last day of the quarter at 13:30 GMT, covering data from the previous quarter.
ISM Manufacturing Index – Index of manufacturing activity
The report is released on the first working day of the month at 15:00 GMT and covers data from the previous month.
The Institute for Supply Management (ISM) Manufacturing Index is the result of a monthly survey of more than 400 companies in 20 industries in 50 states. This data is considered a very important and reliable economic indicator. If the index reads below 50, due to lower activity, it indicates an economic slowdown, especially if the trend continues for several months. A reading significantly above 50 likely indicates a period of economic growth.
MCSI (Michigan Consumer Confidence Index) - University of Michigan Consumer Sentiment Index.
Issued by the University of Michigan on the first of each month, covering data from the previous month.
The University of Michigan Consumer Sentiment Index measures the level of consumer confidence in economic activity. It is a leading indicator that predicts consumer spending that is part of economic activity.
The data comes from a survey of about 500 consumers. Higher readings indicate consumer optimism.
NFP (Changes in non-farm payrolls) – Change in the number of employees in the non-farm sector
Published by the Department of Labor on the first Friday of each month at 15:30 GMT, covering data from the previous month.
Data reflects changes in the total number of paid jobs in the United States in every business area except:
- civil servants;
- private farm workers;
- employees of non-profit organizations providing assistance to individuals;
- farm workers.
The non-farm sector accounts for approximately 80% of total employment. It produces the entire US gross domestic product. It helps policymakers and economists determine the current state of the economy and predict future levels of economic activity. This is a serious market driver, mainly due to large forecast deviations.
Manufacturing PMI (Purchasing Managers Index) – PMI Manufacturing Activity Index
Published on the first working day of each month at 15:00 GMT, covering data from the previous month.
This index is used to measure changes in new factory orders, industrial output, employment, and supplier inventories and speed. Each indicator has different meaning and takes into account seasonal factors. The Association of Purchasing Managers surveys more than 300 purchasing managers nationwide who represent 20 different industries.
A PMI above 50 indicates manufacturing is expanding, while a reading below 50 means industry is contracting. The PMI report is an extremely important indicator for financial markets as it is the best indicator of factory production. This index is popular for identifying inflationary pressures as well as the health of factory production.
The PMI is not as important as the CPI (Consumer Price Index) in identifying inflation, but since it is published at the very beginning of the month, it is quite relevant. If the PMI indicates unexpected changes, it is usually accompanied by a quick reaction in the market. One of the key highlights of the report is the growth in new orders, which predicts manufacturing activity in the coming months.
Retail Sales Data – Retail sales data
Issued by the Census Bureau around the 12th of each month from 13:30 GMT, covering data from the previous month.
Retail sales are key driving force US economy. This metric tracks the products that companies sell at retailers and measures total consumer spending in that area (not including service costs). Income from retail make up the majority (two-thirds) of the American economy. The Census Bureau surveys hundreds of firms of varying sizes that engage in some type of retail trade. Data published monthly shows percentage change compared to the previous month's figures. A negative number means sales have decreased. This indicator is a very important driver of the market because it is used as an indicator of consumer activity, since an increase in the sales figure will mean an increase in economic activity.
Tankan Large Manufacturers Index – Tankan Manufacturing Index
Published by the Central Bank of Japan four times a year - in April, July, October and mid-December at 23:50 GMT.
The Tankan Manufacturing Index measures overall business conditions among large manufacturers. The information is based on a survey of 1,200 large manufacturers in Japan who were asked about their business conditions. This is a key indicator of the Japanese economy, which to a large extent relies on manufacturing industry. Above 0 indicates improving conditions, while below 0 indicates worsening conditions. This index is considered an important driver of the JPY currency pair market.
TIC Net Long-Term Transactions – Volume of purchases of long-term TIC securities
Published by the US Treasury on the 12th of each month at 14:00 GMT, covering data for the previous month.
TIC purchase volume of long-term securities measures the monthly difference in the cost of purchases of U.S. long-term foreign securities and foreign purchases American long-term securities. TIC flows are a key resource for the US government to offset deficits trade balance, which can give a good reflection of the demand for the US dollar.
Trade Balance – Trade balance
Published by the Department of Commerce in the second week of each month.
The index measures the difference in the amount of exported and imported goods (exports minus imports). It is the largest component of the country's balance of payments. Affects the movement of the country's currency.
Basic concepts and factors of financial condition
Enterprises
The financial condition of an enterprise is a complex concept that is characterized by a system of indicators reflecting the availability, allocation and use of the enterprise’s financial resources. The calculation and analysis of such indicators is carried out according to the financial (accounting) statements of the organization in a certain sequence. The financial condition is the result of the interaction of all elements of the system of financial relations of the enterprise and is therefore determined by the entire set of production and economic factors, both external and internal.
External factors that have a strong influence on the activities of the enterprise include:
· demographic condition in the country, affecting the size and structure of consumption and the effective demand of the population;
· the state of the country’s economy, which determines the level of income and savings of the population, and, consequently, its purchasing power;
· high level inflation on a national and global scale, negatively affecting the development of the national economy and causing a general economic decline;
political stability and direction domestic policy implemented through the levers of economic legislation;
· the level of science and technology, which is associated with all components of the production process of a product and its competitiveness;
· level of culture of the population and national traditions, influencing habits and norms of consumption, preferences in the choice of goods;
· financial condition of business partners, primarily debtors;
· international situation(wars, conflicts, coups, etc.), on which the financial condition of the enterprise depends on the presence of foreign partners.
Internal factors that have a significant impact on the financial development of an enterprise are the result of the activities of the enterprise itself. They are divided into three subgroups depending on the characteristics of the formation of the enterprise’s cash flows:
· factors related to production (operational) activities;
· factors related to investment activities;
· factors related to financial activities.
Regular financial analysis of the enterprise's activities provides management with the necessary information to make adequate management decisions.
An analysis of financial condition based on financial statements takes on the character of an external analysis, i.e. analysis carried out outside the enterprise by its interested counterparties, owners or government agencies, based on reporting data that contains a limited part of information about the activities of the enterprise. However, they allow external users of reporting to fairly objectively assess the financial condition of the enterprise without using information that is a trade secret (management accounting data).
The method of external analysis of the financial condition of an enterprise is necessary not only for the purposes of assessment by potential partners, but also for one’s own self-assessment, carried out from the point of view of external users of financial (accounting) statements. Any enterprise is far from indifferent to what indicators its financial condition will be assessed by potential counterparties, shareholders, and creditors. In order to be able to establish correspondence between internal and external assessments of financial condition, there must be a single methodological “core” that unites different kinds analysis.
Such a tool is financial analysis, which represents a system of certain knowledge associated with the study of the financial position of an enterprise and its financial results, which are formed under the influence of objective and subjective factors, based on financial reporting data. The manager of an industrial, commercial or other organization must know financial analysis, since it is the methodological, information base on which the financial policy of the enterprise and the relationship with it of investors, creditors, and shareholders is built. The effectiveness of management decisions depends on how well it is carried out. Obviously, the manager who accepts them must master the appropriate techniques and understand the essence of the indicators and results of the analysis, even carried out in specialized services of the enterprise.
Goals and stages of financial analysis
Enterprise financial statements
Financial analysis uses step by step procedures analysis of the enterprise's accounting reports to evaluate its production, sales, marketing and other activities. That is, the subject of financial analysis is economic phenomena and processes occurring in the enterprise as a whole, which are reflected in a system of interrelated economic indicators.
The purpose of financial analysis is to assess the past activities and current position of the enterprise, as well as to assess the future potential of the enterprise. This type of analysis should provide the administration with information about the future for making strategic management decisions.
Financial analysis solves the following problems:
· identifies the degree of balance between the movement of material and financial resources, evaluates the flow of own and borrowed funds in the process of economic circulation, aimed at extracting maximum or optimal profit, increasing financial stability, etc.;
· makes it possible to monitor the correctness of the financial flows of the enterprise, compliance with norms and standards for the expenditure of financial and material resources, and the appropriateness of expenses;
· allows you to assess the correct use of funds to maintain an effective capital structure and predict the solvency of the enterprise.
At the first stage of financial analysis, it is necessary to determine the approach or direction of analysis: whether to compare the indicators of the enterprise with the average indicators of the national economy or industry, or the indicators with the indicators of this enterprise over past periods of time, or the indicators with the indicators of other competing enterprises. Each approach requires its own methods of analysis and selection of relevant information.
At the second stage, the quality of information and the quality of income are assessed, i.e. the influence of accounting methods and methods on the formation of profit and other financial results. Thus, net profit is the “core” of all financial indicators. How significant is it? The “quality” of net profit can be affected by the methods of accounting and calculating profit from the sale of products, works and services, the nature of the results of other sales and non-operating results, tax conditions and tax benefits, etc. The amount of profit from sales of products depends on the methods of writing off bad debts, on the accepted assessment of inventory, and methods of calculating depreciation of both fixed assets and intangible assets.
At the third stage, the analysis itself is carried out using the following main methods:
· horizontal - comparison of each position of the balance sheet or other form of reporting with data from the previous period;
· vertical - determining the structure of the indicator’s components, the influence of each position on the result as a whole;
· trend - analysis of an indicator over a number of years and determination of a trend using mathematical processing of a series of dynamics.
The analysis can be carried out using both absolute and relative indicators.
1.3. Sequence, content and information base
Financial analysis
The financial condition of the enterprise is formed in the process of all production and economic activities. Determining it for a particular date answers the question of how correctly the enterprise managed financial resources during the period preceding this date.
The sequence and content of the financial analysis of the activities of a business entity can be determined in the following form.
1. Preliminary familiarization with the results of the enterprise’s work.
2. Calculation of the main indicators of financial condition indicators.
3. Comparison of calculated values with standard values or with the results of similar enterprises.
4. Classification of an enterprise to a certain class based on its financial status.
Let us consider in detail the contents of the complete process of financial analysis.
A preliminary review of the results of the enterprise’s work is carried out on the balance sheet in the following sequence.
1. Determine the general direction of financial and economic activities. In this case, the balance sheet total at the end of the period is compared with the total at the beginning of the period (amounts on line 1600 and line 1700). This is a horizontal analysis to determine general direction balance movements: an increase in the balance total is assessed positively, a decrease - negatively.
2. Determine the nature of changes in individual balance sheet items. At the same time, positive changes include an increase in the asset balance of cash balances (line 1250), financial investments (line 1240), intangible assets (line 1110), and inventories (line 1210).
Positive changes in the liabilities side of the balance sheet include an increase in the amount of profit (line 1370) and future income (line 1530).
A sharp increase in accounts receivable on the asset side (line 1230) and accounts payable on the liability side of the balance sheet (line 1520) deserves a negative assessment.
3. Analyze the presence and increase in balances for the “sick” balance sheet item: “Losses” (p. 1370). The presence of losses indicates the extremely unsatisfactory performance of the enterprise in the reporting period and the resulting poor financial position. The negative difference between income and expenses for the enlarged range of items can be traced in form No. 2. The reasons for unprofitable work can be analyzed in more detail using internal accounting data. Thus, an element of debt to suppliers and contractors (line 15201) is debt to suppliers for settlement documents not paid on time. The presence of such overdue debt indicates serious financial difficulties for the enterprise.
The main indicators of the financial condition of the enterprise include:
· solvency indicators (absolute liquidity ratios, quick liquidity ratios, current liquidity ratios, etc.);
· indicators of financial stability (capitalization ratios, availability of own sources of financing, financing, financial stability);
· indicators of business activity (resource productivity, capital productivity, return on equity capital, working capital turnover, etc.);
· profitability indicators (return on sales, net profitability, return on equity, gross profitability, profitability of core activities, etc.).
The set of economic indicators characterizing the financial position and activity of an enterprise in the market depends on the depth of the study. However, most methods for analyzing financial position involve calculating the following groups of indicators: indicators of balance sheet liquidity, business activity (working capital turnover), financial stability, profit and profitability with a preliminary calculation of indicators characterizing the overall assessment of the enterprise’s property and production potential: sales revenue in monetary terms, natural meters; costs associated with the production and sale of products; cost of fixed assets; number of employees and their wage fund; profitability indicators; capital productivity, etc. The use of such a system of indicators in their interrelation helps to evaluate financial and economic activities, identify factors influencing the result, and determine the further financial strategy of the enterprise.
For the final assessment of the balance sheet state of the enterprise, it is necessary to compare the calculated indicators with standard (normative) ones.
In countries with developed market economy standard indicators are developed by financial, tax, and expert firms. In Russia, this work has not been carried out in full, but the theoretical values of many indicators have already been determined. We will use these values in our analysis. If there are no standards for the calculated indicators, then the calculation results, if possible, should be compared with the values of these indicators at enterprises that produce products similar to those of the enterprise and have production capacities comparable to its capacities.
The information base of financial analysis is accounting (financial) reporting - a unified system of data on the property and financial position of the organization and the results of its economic activities.
It must be remembered that, according to the law, calculations for certain types of taxes do not and cannot apply to financial statements, tax returns and other forms of tax reporting.