How is a financial analysis of an enterprise carried out? Analysis of the financial condition of the enterprise
Application for assessment of the financial condition of an enterprise
It is one of the key points in its assessment, as it serves as the basis for understanding the true position of the enterprise. Financial analysis is the process of researching and evaluating an enterprise in order to develop the most informed decisions for its further development and understanding of its current state.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 the enterprise includes an analysis of balance sheets and financial performance reports of the company being valued over past periods to identify trends in its activities and determine key 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 reporting analysis 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.
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.
3. Analysis of financial condition
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.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 an enterprise has cash and cash equivalents sufficient to pay accounts payable that require 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:
A1. Most liquid assets- these include all items of the enterprise’s funds and short-term financial investments. This group is calculated as follows: (line 260+line 250)
A2. Quickly marketable assets- accounts receivable, payments for which are expected within 12 months after the reporting date: (line 240+line 270).
A3. Slow moving 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:
A4. Hard to sell assets- articles of section I of the balance sheet asset - non-current assets: (line 110+line 120-line 140)
Balance sheet liabilities are grouped according to the degree of urgency of their payment.
P1. Most urgent obligations- these include accounts payable: (line 620+line 670)
P2. Short-term liabilities- these are short-term borrowed funds and other short-term liabilities: (line 610+line 630+line 640+line 650+line 660)
P3. Long-term liabilities- these 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. 510+p. 520)
P4. Permanent liabilities or stable- these are articles of section IV of the balance sheet “Capital and reserves”. (p. 490-p. 217). If the organization has losses, they are deducted:
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:
A1 > P1; A2 > P2; A3 > P3; A4
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 = (A1 + A2) - (P1 + P2)
Prospective liquidity of LPs is a forecast of solvency based on a comparison of future receipts and payments:
PL = A3 - P3
The analysis of financial statements and balance sheet liquidity carried out according to the above scheme is approximate. The analysis of financial indicators and ratios is more detailed.
3.3. Analysis of financial independence and capital structure
An assessment of the financial condition of an enterprise will be incomplete without an analysis of financial stability. Financial independence is a certain state of the company’s accounts that guarantee its constant solvency.
Analysis of financial independence for a particular date allows us to answer the question: how correctly the organization managed financial resources during the period preceding this date. The essence of financial independence is determined by the effective formation, distribution and use of financial resources. An important indicator that characterizes the financial condition of an enterprise and its independence is the provision of material working capital from its own sources, i.e. financial independence is the provision of reserves with sources of their formation, and solvency is its external manifestation. What is important is not only the ability of an enterprise to repay borrowed funds, but also its financial stability, i.e. financial independence of the enterprise, the ability to maneuver its own funds, sufficient financial security for the uninterrupted process of activity.
The objectives of analyzing the financial stability of an enterprise is to assess the size and structure of assets and liabilities - this is necessary in order to find out:
a) how independent the enterprise is from a financial point of view;
b) the level of this independence is increasing or decreasing and whether the state of assets and liabilities meets the objectives of the financial and economic activities of the enterprise.
Financial independence is characterized by a system of absolute and relative indicators. Absolute ones are used to characterize the financial situation arising within one enterprise. Relative - to characterize the financial situation in the economy, they are called financial ratios.
The most general indicator of financial independence is the surplus or lack of a source of funds for the formation of reserves. The point of analyzing financial independence using an absolute indicator is to check which sources of funds and in what amount are used to cover reserves.
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Today it is no longer a secret to anyone that, about which there were fierce debates and discussions just a couple of decades ago, so many copies were broken and pencils were far from freely floating in the vastness of purchase and sale. Freedom here lies in the strict implementation of all laws and following the trends and directions that dictate. Financial analysis occupies a special place.
General information about the analysis
It is equally important that our domestic material assets, finance and services are quite young compared to global competitors. It acquired civilized features relatively recently, having outgrown the conditions of wild distribution of resources and goods. Therefore, today it could not be more important to apply advanced and classical financial technologies of assessment, analysis, long-term planning, logistics and other economic disciplines. Perhaps someone will argue that our market economy is too young and it is difficult to apply the strict canons of international classics to it. However, it is the novelty and freshness of the domestic economic space that is the most fertile environment for initially correctly building all aspects of a market type of business.
Features of financial analysis
Over the past ten fifteen years, even a person far from the issues of economic development has become aware that the period of formation of a market economy and the emergence of various types of financial institutions provides freedom of choice in terms of income generation, and, consequently, improvement of material wealth and quality of life. The choice of priorities, directions for investment and financial resources requires a coherent system of criteria, analysis capabilities and further development of strategy and tactics for the subject’s behavior in the market. Modern technologies for assessing and monitoring the current state, studying literally every figure in cost, time and perspective allows us to obtain a comprehensive picture of the capabilities of a particular business entity. International companies and concerns use such an important area of analytical activity as a complex of diagnostics of financial and economic conditions. It is difficult to overestimate the importance of such an important tool, but in the conditions of our developing market, this technique for systematization as a scientific and practical concept is almost not developed or developed. Even the most famous experts often replace diagnostics of market conditions with classical financial analysis. Fundamentally, these concepts do not contradict each other. Financial analysis techniques and diagnostic tools are a way of understanding the surrounding material world based on fundamental, theoretical and applied research.
What is analysis? This is the perfect tool to explore the world. What is attractive about it is its universality in all branches of knowledge available to humanity today, without exception. Main features of the analysis:
Primacy in assessing the surrounding economic state of an object or subject.
Financial analysis can be used as a universal set of criteria at any static point in time.
Allows you to successfully solve global problems in those places where society lacks development for critical assessments and making serious decisions.
Analytics of various levels of complexity is a procedure through which an object or phenomenon is virtually, mentally, and actually divided into parts necessary for research.
can take on various forms and directions. In this case, the nature of the object being studied, the complexity of its structural component, the level of abstraction from known cognitive tools and methods of their implementation are of decisive importance.
The difference between diagnostics is that these are processes that make it possible to recognize the current state of an object or phenomenon, to make a diagnosis for further decision-making on how to maintain the organism of an enterprise or company in an active working state for a long time. That is, financial analysis provides a database for further financial diagnostics and a successful harmonious solution.
A little about the origins of financial analysis
The use of financial analysis in the form that we can observe today has become acceptable only recently. Talking about the origins of such a convenient technique is also problematic. Since humanity began to produce, grow and sell something, that is, to carry out commodity exchange procedures and then count, elements of analytical functions have been a characteristic feature of any economic activity. Particularly interesting is the fact of the applied use of the predecessor of today's financial analysis back in the 12th century, when Britain at the dawn of the feudal system used manorial accounting and. It was then that the first features of the modern perception of credentials appeared. If we take into account that in the Greek and Roman valuation systems, property and methods of controlling accounts dominated, then the British were the first to use methods for calculating the current and final results of a transaction. Thanks to a fairly serious integrated approach, accounting, control and analytical functions were harmoniously combined into a single whole.
A more modern systematic economic analysis, as a component of accounting, was proposed by the Frenchman Jacques Savary in the seventeenth century. The use of such concepts as synthetic and analytical accounting was used by the Italians A. Di Pietro and B. Venturi, who built analytical series of dynamics of indicators of the economic activity of a company or economy for a certain period of time.
The real luminaries of domestic accounting science and systems for analyzing balance sheet data are A.K. Roshchakhovsky, A.P. Rudanovsky, N.A. Blatov, I.R. Nikolaev. Thus, the essence of financial analysis became commercial formulas for calculating balance sheet data. In the early nineties of the last century, financial analysis in its original form was returned to the accounting and economic departments of enterprises in its classical form. Methods for managing effective resources of business entities have become the main and priority type of work of accounting departments and specialists in the field of financial management.
Types and tasks of financial analysis
Any activity, including those aimed at reviewing certain types of results of an enterprise’s work, has clearly defined goals and objectives. The main purpose of financial analysis is to compile a general description of the economic, industrial, financial condition of a business entity from a huge enterprise, a small company to a budget organization. The objectives of the analysis are the following types and categories of business:
1. Assets and other property.
2. and refinancing.
3. Solvency or level of liquidity.
4. Financial stability.
5. Financial results and .
6. Business activity.
7. Cash flows.
8. Investments and.
9. business.
10. Risks and probability of bankruptcy.
11. Level of comprehensive assessment of financial condition.
12. Designing a forecast of the financial situation.
13. Preliminary conclusions and development of recommendations.
In addition, internal and external analysis is carried out. That is, the collection of information and its development is carried out by the company’s staff or external employees, for example, representatives of analytical bureaus and consulting centers. Analytics is divided into retrospective, based on past information, and forward-looking, as an assessment of possible plans and forecast directions. The breakdown of analytical data is as follows. Key financial indicators provide information for express analysis. All detailed indicators and their dynamics over time provide complete and comprehensive data on all aspects of the company’s activities, which is a detailed detailed financial analysis. According to the nature of the analytical procedures, they are divided into the following types: analytical development of financial and accounting statements, assessment of the investment climate and the level of efficiency of capital investments in, the price chart of a package of securities provides data for technical analysis. A separate position is carrying out analytical activities for a specially designated task. Based on all or one of the presented methods, it is possible in a fairly short time to prepare basic data on the prospects for the company’s activities and identify those weak points where one or another moment was missed to improve the status and financial stabilization.
Analysis methods used today
Today, a coherent system of approaches to conducting analytical procedures in relation to a variety of indicators has been developed and is functioning successfully. Often, in today's financial world it is customary to evaluate data that differs in structure, time and value categories. Such diversity allows us to create more than just a linear picture of the activities of a particular subject. This is an opportunity to create a three-dimensional picture for both the past and the current moment, as well as in the short and long term, as well as link them together into a single whole. In the vast majority of cases, this is precisely the main task of analyzing financial activities as an applied scientific and practical tool. To date, the following types of analytics techniques have been developed and are actively used:
A comparison technique when each reporting item is compared with the indicators of the previous period - horizontal analytics.
Isolation of individual articles from the final indicator, determination of the specific weight in relation to the results equal to 100% - structural analytics.
Each balance sheet position is compared in relation to previous periods and the main trend of the indicator’s movement is determined. The trend analysis technique allows you to study the future and develop a forecast.
Calculations of the ratio of individual items of accounting or tax reporting, determination of the relationship between indicators - analytics of the relative level of coefficients.
Comparison of balance sheet data provided by subsidiaries and structural divisions allows for spatial analytics. This is also acceptable for comparison with competitors’ data, the industry average level of indicators and the development of further enterprise strategy.
Techniques of factor analysis occupy a special place. This is a consideration of the processes of influence of individual causes or mass factors on combined resulting indicators. This type of analytics can be direct, as provided by classical techniques, or reciprocal, that is, based on connecting data and their synthesis.
Possible sources of primary information
In a competitive market, the level of information security is of great importance, especially with regard to data on the economic state of a company or enterprise. The confidentiality of accounting, financial, and tax reporting is guaranteed to each business entity by the state at the legislative level. For this purpose, enterprises use a variety of security systems and technical achievements of modern progress. However, how can you use the data to conduct financial analysis without affecting the data that is under special control? For this, other main external sources are used that do not affect the confidentiality of the company's activities. This could be expert assessments of the state of the economy, parts or segments of the financial market, the current level of political and economic condition, or a package of securities, the state of profitability of these securities, possible alternatives to profitability, comparison of indicators of the financial and economic condition of similar companies.
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Background to financial analysis. The essence of financial analysis and its tasks. Classification of methods and techniques of analysis. Information basis of financial analysis. Types of financial analysis. The importance of financial analysis in modern conditions.
The financial analysis
The essay on business ethics was completed by a fourth year student gr. 7212 Kirsanov E.A.
Moscow State Industrial University
Faculty: Economics, management and information technology
Moscow, 2001
Introduction.
In the Russian Federation, the market economy and competition are gaining increasing strength as the main mechanism for regulating the economic process. The independence of enterprises and their economic and legal responsibility are increasing. The importance of financial stability of business entities is increasing sharply. All this significantly increases the role of analysis of their financial condition: the availability, placement and use of funds.
The results of such an analysis are needed primarily by owners, as well as creditors, investors, suppliers, managers and tax services, i.e. are the subject of attention of a wide range of market participants interested in the results of its functioning.
To ensure the survival of an enterprise in modern conditions, management personnel must, first of all, be able to realistically assess the financial condition of both their enterprise and existing potential competitors. Financial condition is the most important characteristic of the economic activity of an enterprise. It determines competitiveness, potential in business cooperation, assesses the extent to which the economic interests of the enterprise itself and its partners are guaranteed in financial and production terms. However, the ability to realistically assess the financial condition is not enough for the successful functioning of an enterprise and its achievement of its goal.
The competitiveness of an enterprise can only be ensured by proper management of the movement of financial resources and capital at its disposal.
In a market economy, an independent direction has long been formed that allows solving a number of assigned tasks, known as “Financial Management” or “Financial Management”.
In current conditions, a financial manager becomes one of the key figures in the enterprise. He is responsible for posing financial problems, analyzing the feasibility of using one or another method of solution adopted by the management of the enterprise, and proposing the most acceptable course of action.
The activities of a financial manager in general can be represented by the following areas: general financial analysis and planning; providing the enterprise with financial resources (management of sources of funds), distribution of financial resources (investment policy).
Successful financial management aims to:
– survival of the company in a competitive environment
– avoiding bankruptcy and major financial failures
– leadership in the fight against competitors
– acceptable growth rates of the company’s economic potential
– growth in production and sales volumes
– profit maximization
– cost minimization
– ensuring the profitable operation of the company
Background to financial analysis
Financial analysis in its modern form appeared relatively recently. Searching for the origins of the science of economic analysis is largely futile. Elements of the analytical function are inherent in any economic activity. In particular, analysis was an integral part of the system of manorial accounting and audit (a system of accounting and control on agricultural estates) in feudal Britain (12th century). It should be noted that, in contrast to the audit of the Greek and Roman periods, a feature of the British medieval audit was the auditor’s focus not only and not so much on inventorying property and controlling accounts, but primarily on calculating the results of a particular transaction. There were often cases when accounts were adjusted, and the amount for which the manager had to account to his master increased. There is an interrelation between accounting, control and analytical functions.
The founder of systematized economic analysis as an integral element of accounting, apparently, should be considered the Frenchman Jacques Savary (1622-1690), who introduced the concept of synthetic and analytical accounting (he is rightfully considered the forerunner of management accounting and the science of enterprise management). Of course, the formation and use of elements of economic analysis were observed at that time in other countries, in particular in Italy. Thus, A. Di Pietro promoted a methodology for comparing successive budget allocations with actual costs; B. Venturi built and analyzed time series of indicators of the enterprise’s economic activity for ten years.
Savary's ideas were deepened in the 19th century by the Italian accountant Giuseppe Cerboni (1827-1917), who created the doctrine of synthetic addition and analytical decomposition of accounting accounts. At the end of the nineteenth and beginning of the twentieth centuries. An original concept in accounting appeared - balance sheet science. It developed in three main directions: economic analysis of the balance sheet, legal analysis of the balance sheet, popularization of knowledge about the balance sheet among users.
The first direction was developed by I. Sher, P. Gerstner and F. Leitner. In particular, Gerstner introduced the concepts of analytical characteristics of the balance sheet: the ratio of short- and long-term liabilities, establishing an upper limit of borrowed funds in the amount of 50% of advanced capital, the relationship between financial condition and liquidity, etc. The main contribution to the development of the second direction was made by R. Beigel, E. Roemer, K. Porzig and other scientists. Within the framework of this direction, the theory and practice of accounting audit were later developed. The third direction was also developed mainly by German scientists: Brosius, Huber, Schönwandt and others.
In Russia, the science of balance analysis flourished in the first half of the twentieth century. A.K. Roshchakhovsky (1910) is rightfully considered the first Russian accountant to truly appreciate the role of economic analysis and its relationship with accounting. In the 20s, the theory of balance science, in particular the methodology for analyzing balance, was finally formulated in the works of A.P. Rudanovsky, N.A. Blatova, I.R. Nikolaeva and others. At the end of the 19th - beginning of the 20th centuries. The science of commercial computing is also actively developing. Balance sheet analysis and commercial calculations thus constituted the essence of financial analysis.
As the planned socialist economy was built in the Soviet Union, financial analysis was relatively quickly transformed into an analysis of economic activity. This happened through the natural (within the framework of a socialist economy) belittling the role of commercial calculations, strengthening the control function, dominating the analysis of deviations of actual values of indicators from planned ones, and reducing the importance of the balance sheet as a financial management tool. Analysis became more and more separated from accounting, its financial nature was emasculated; in essence, it turned into a technical and economic analysis (analysis of production indicators, sales, labor and wages, etc.), which was not really dealt with by anyone: not accountants (since this is not within the scope of their activities, and does not represent a professional interest), nor managers. The essence of such analysis was the implementation of the “plan-fact” scheme, and the analysis itself was essentially replaced by control. This analysis was retrospective in nature and therefore of little use.
The transformation of accounting carried out as part of the restructuring of the economy on a market basis (early 90s) again brought back to life such an important element of analytical work as financial analysis. It is based on the analysis and management of the financial resources of a business entity as the main and priority type of resources. The main performers of this analysis were accountants and financial managers. It is important to note that the analysis of economic activity, understood as a technical and economic analysis, is not canceled - it simply becomes the prerogative of line managers.
The essence of financial analysis and its tasks.
The content and main goal of financial analysis is to assess the financial condition and identify the possibility of increasing the efficiency of the functioning of an economic entity with the help of rational financial policy. The financial condition of an economic entity is a characteristic of its financial competitiveness (i.e., solvency, creditworthiness), the use of financial resources and capital, and the fulfillment of obligations to the state and other economic entities.
In the traditional sense, financial analysis is a method of assessing and forecasting the financial condition of an enterprise based on its financial statements. It is customary to distinguish two types of financial analysis - internal and external. Internal analysis is carried out by enterprise employees (financial managers). External analysis is carried out by analysts who are outsiders to the enterprise (for example, auditors).
Analysis of the financial condition of an enterprise has several goals:
determination of financial position;
identifying changes in financial condition in space and time;
identification of the main factors causing changes in financial condition;
forecast of main trends in financial condition.
Achieving these goals is achieved through various methods and techniques.
3. Classification of methods and techniques of analysis.
The method of financial analysis is understood as a way of approaching the study of economic processes in their formation and development.
The characteristic features of the method include: the use of a system of indicators, identifying and changing the relationship between them.
In the process of financial analysis, a number of special methods and techniques are used.
Methods of applying financial analysis can be divided into two groups: traditional and mathematical.
The first group includes: the use of absolute, relative and average values; technique of comparison, summary and grouping, technique of chain substitutions.
The method of comparison is to compile financial indicators of the reporting period with their planned values and with the indicators of the previous period.
The method of summary and grouping is to combine information materials into analytical tables.
The method of chain substitutions is used to calculate the magnitude of the influence of factors in the overall complex of their impact on the level of the aggregate financial indicator. The essence of valuable substitution techniques is that by sequentially replacing each reporting indicator with a basic one, all other indicators are treated as unchanged. This replacement allows us to determine the degree of influence of each factor on the overall financial indicator.
The literature on financial analysis provides a variety of methods of financial analysis and their classification. They can be divided into three main groups:
1) Methods directly or indirectly borrowed from other sciences;
2) Models used in financial analysis;
3) Methods for reading financial statements.
There are various classifications of methods that can be applied in financial analysis. The first level of classification distinguishes between informal and formalized methods of analysis. The first are based on the description of analytical procedures at a logical level, rather than on strict analytical dependencies. These include methods: expert assessments, scenarios, psychological, morphological, comparisons, constructing systems of indicators, constructing systems of analytical tables, etc. The use of these methods is characterized by a certain subjectivity, since the intuition, experience and knowledge of the analyst are of great importance.
The second group includes methods that are based on fairly strict formalized analytical dependencies. Dozens of these methods are known; they constitute the second level of classification. Let's list some of them.
Classical methods of analysis of economic activity and financial analysis: chain substitutions, arithmetic differences, balance sheet, isolating the isolated influence of factors, percentage numbers, differential, logarithmic, integral, simple and compound interest, discounting.
Traditional methods of economic statistics: average and relative values, groupings, graphical, index, elementary methods for processing dynamics series.
Mathematical and statistical methods for studying relationships: correlation analysis, regression analysis, variance analysis, factor analysis, principal component method, covariance analysis, object-period method, cluster analysis, etc.
Econometric methods: matrix methods, harmonic analysis, spectral analysis, methods of the theory of production functions, methods of the theory of input balance.
Methods of economic cybernetics and optimal programming: methods of system analysis, methods of machine simulation, linear programming, nonlinear programming, dynamic programming, convex programming, etc.
Operations research methods and decision theory: graph theory methods, tree method, Bayesian analysis methods, game theory, queuing theory, network planning and management methods.
Of course, not all of the listed methods can find direct application within the framework of financial analysis, since the main results of effective analysis and financial management are achieved with the help of special financial instruments, however, some of their elements are already in use. In particular, this applies to methods of discounting, machine simulation, correlation and regression analysis, factor analysis, processing time series, etc.
Financial analysis is carried out using various types of models that allow structuring and identifying the relationships between key indicators. Three main types of models can be distinguished: descriptive, predicative and normative.
Descriptive models, also known as descriptive models, are fundamental for assessing the financial condition of an enterprise. These include: construction of a system of reporting balance sheets, presentation of financial statements in various analytical sections, vertical and horizontal analysis of reporting, a system of analytical coefficients, analytical notes for reporting. All these models are based on the use of accounting information. The analysis carried out in the second section of this work will represent the construction of a descriptive model.
Predictive models are models of a predictive, predictive nature. They are used to forecast a company's income and its future financial condition. The most common of them are: calculating the point of critical sales volume, constructing predictive financial reports, dynamic analysis models (strictly determined factor models and regression models), situation analysis models.
Normative models. Models of this type allow you to compare the actual results of enterprises with the expected ones calculated according to the budget. These models are used primarily in internal financial analysis. Their essence comes down to establishing standards for each cost item for technological processes, types of products, responsibility centers, etc. and to the analysis of deviations of actual data from these standards. The analysis is largely based on the use of strictly deterministic factor models.
The basic principle of analytical reading of financial statements is a deductive method, that is, from the general to the specific, but it must be applied repeatedly. In the course of such an analysis, the historical and logical sequence of economic facts and events, the direction and strength of their influence on the results of activity are reproduced.
The practice of financial analysis has already developed the main types of analysis (methodology of analysis) of financial reports. Among them there are 6 main methods:
horizontal (time) analysis - comparison of each reporting item with the previous period;
vertical (structural) analysis - determining the structure of the final financial indicators, identifying the impact of each reporting item on the result as a whole;
trend analysis - comparison of each reporting item with a number of previous periods and determination of the trend, i.e. the main trend of the indicator dynamics, cleared of random influences and individual characteristics of individual periods. With the help of a trend, possible values of indicators in the future are formed, and therefore, a promising forecast analysis is carried out;
analysis of relative indicators (coefficients) - calculation of relationships between individual report positions or positions of different reporting forms, determination of relationships between indicators;
comparative (spatial) analysis is both an intra-farm analysis of summary reporting indicators for individual indicators of an enterprise, branches, divisions, workshops, and an inter-farm analysis of the indicators of a given enterprise in comparison with the indicators of competitors, with industry average and average economic data;
factor analysis - analysis of the influence of individual factors (reasons) on a performance indicator using deterministic or stochastic research techniques. Moreover, factor analysis can be either direct (analysis itself), when the effective indicator is divided into its component parts, or reverse (synthesis), when its individual elements are combined into a common effective indicator.
In conclusion, it should be said that not all the methods and models outlined above will be used by me in this work during the analysis of the financial condition. This is due to the limited information available, as well as the fact that the analysis will be primarily external.
The analysis will use a descriptive model, i.e. a descriptive model within which the following methods and areas of analysis are applicable:
1) Vertical and horizontal analysis of reporting - the expression of this method will be the construction of a comparative analytical balance;
2) Construction of a system of analytical coefficients on the basis of which financial stability and liquidity will be considered;
3) Factor analysis - determining the degree of influence of individual components of an indicator on its value - will be carried out when considering the structure of assets and liabilities, sales revenue;
4) Profitability analysis - the indicators of this group will be used to assess the overall effectiveness of investing in a given enterprise.
Currently, it is almost impossible to isolate the techniques and methods of any science as inherent exclusively to it. Similarly, in financial analysis, various methods and techniques are used that have not previously been used in it.
4. Information basis of financial analysis.
The sources of information for financial analysis set the following tasks:
1). Determine which documents are the main sources for financial analysis;
2). Describe these documents, their advantages and disadvantages;
3). Determine the basic requirements for sources of financial analysis information.
The effectiveness of enterprise management is largely determined by the level of its organization and the quality of information support.
Accounting data is of particular importance as the information basis for financial analysis, and reporting becomes the main means of communication that provides a reliable representation of information about the financial condition of the enterprise. There are several reasons for this, the main one being a change in forms of ownership. This process, which is developing most dynamically in the sphere of circulation, quite naturally led to the destruction of many vertical connections and the subsequent information isolation of enterprises.
The main, most accessible and compact sources of information for analyzing the financial condition of an enterprise are financial reporting forms No. 1, 2, 3, and if the analysis is carried out by internal users, then also current accounting data.
The quarterly reporting includes: the balance sheet of the enterprise (Form No. 1) and a report on financial results and their use (Form No. 2). Annual financial statements include three standard forms: Form No. 1, Form No. 2, Form No. 3 - a report on the financial and property condition of the enterprise and an explanatory note. These forms are compiled by counting, grouping and specialized processing of current accounting data and are its final stage.
The main source of information for financial analysis is the enterprise’s balance sheet (Form No. 1 of annual and quarterly reporting), which provides a kind of “snapshot” of the financial condition at the beginning and end of the reporting period. Its importance in this regard is so great that financial analysis is often called balance sheet analysis. Although an in-depth analysis of financial condition has always involved the use of other forms of annual reports, as well as accounting data, the balance sheet plays a decisive role.
The logic and nature of the tasks of analyzing financial condition are closely interconnected with the form and structure of the balance sheet, the composition of sections and articles of its assets and liabilities. However, this does not mean, of course, that the form of the balance determines the logic and tasks of the analysis. The balance sheet generally reflects the economic assets of an enterprise in monetary value as of a certain date, grouped by their composition and sources of education. Therefore, the balance sheet, in essence, is a practically used system model that generally reflects the circulation of funds of an enterprise and the financial relations into which the enterprise enters during this circulation.
The source of data for the analysis of financial results is the report on financial results and their use (Form No. 2 of annual and quarterly reporting).
Why are such sources of information convenient for financial analysis?
First of all, by the fact that without preparing data for analysis based on the balance sheet of the enterprise (Form No. 1) and (Form No. 2), it is possible to make a comparative express analysis of the enterprise’s reporting indicators for previous periods.
Secondly: with the advent of special automated accounting programs for analyzing the financial condition of an enterprise, it is convenient, immediately after drawing up reporting forms, without leaving the program, to carry out a simple express analysis of the enterprise based on ready-made accounting reporting forms using the built-in financial analysis unit.
Financial analysis, based only on financial statements, takes on the character of external analysis, i.e. analysis carried out outside the enterprise by its interested counterparties, owners or government agencies. This analysis, based only on reporting data, which contains only a very limited part of information about the activities of the enterprise, does not allow revealing all the secrets of the success or failures of the company, however, it becomes possible for external users of the reporting to fairly objectively assess the financial condition of the enterprise, its business activity and profitability, without using information that is a trade secret.
There is a variety of economic information about the activities of enterprises and many ways to analyze these activities. Financial analysis based on financial statements is called the classical method of analysis. On-farm financial analysis uses data on technical preparation of production, regulatory and planning information and other system accounting data as a source of information.
Any enterprise, to one degree or another, constantly needs additional sources of financing. You can find them on the capital market, attracting potential investors and creditors by objectively informing them about your financial and economic activities, that is, mainly through financial statements. How attractive the published financial results are, showing the current and future financial condition of the enterprise, is the likelihood of obtaining additional sources of financing.
The main requirement for the information presented in the reporting is that it be useful to users, i.e. so that this information can be used to make informed business decisions. To be useful, information must meet the following criteria:
1). Relevance means that the information is significant and influences the decision made by the user. Information is also considered relevant if it allows for prospective and retrospective analysis.
2). The reliability of information is determined by its veracity, the predominance of economic content over the legal form, the possibility of verification and documentary validity. Information is considered truthful if it does not contain errors and biased assessments, and also does not falsify economic events.
3). Neutrality - implies that financial reporting does not emphasize the interests of one group of users of general reporting to the detriment of another.
4). Understandability means that users can understand the content of the reporting without special professional training.
5). Comparability - requires that data about the activities of an enterprise are comparable with similar information about the activities of other firms.
During the preparation of reporting information, certain restrictions on the information included in the reporting must be observed:
1). The optimal balance of costs and benefits, which means that the costs of reporting should be reasonably related to the benefits that the enterprise derives from presenting this data to interested users.
2). The principle of prudence (conservatism) suggests that reporting documents should not allow an overestimation of assets and profits and an underestimation of liabilities.
3). Confidentiality requires that reporting information does not contain data that could harm the competitive position of the enterprise.
According to the scope of accessibility, information can be divided into open and closed (secret). The information contained in accounting and statistical reporting goes beyond the boundaries of the business entity and is open information. Each business entity develops its own targets, norms, standards, tariffs, limits, a system for their assessment and regulation of financial activities. This information constitutes his trade secret, and sometimes “know-how”.
In conclusion, based on the tasks set, the following conclusions can be drawn:
The main sources of information for financial analysis are: Form No. 1 and Form No. 2 of quarterly and annual reporting, Form No. 3 of annual reporting, internal accounting, planning and forecasting data;
Form No. 1 - “Balance Sheet of an Enterprise” - provides basic information for analyzing the financial condition at the beginning and end of the reporting period, as well as its dynamics for one or a number of reporting periods;
Form No. 2 - “Report on the financial results of the enterprise” provides information on the financial results of activities for the reporting period;
The main requirements for sources of information used in financial analysis are: relevance, reliability, neutrality, understandability, comparability;
According to the scope of availability, information is divided into open (financial reporting forms) and closed (internal accounting and planning information) or secret.
5. Types of financial analysis.
Current (retrospective) analysis is based on accounting and static reporting and allows you to evaluate the work of associations, enterprises and their divisions for the month, quarter and year on an accrual basis.
The main task of the current analysis is an objective assessment of the results of commercial activities, a comprehensive identification of existing reserves, their mobilization, achieving full compliance with material and moral incentives based on labor results and quality of work.
Current analysis is carried out during the summing up of economic activities, the results are used to solve management problems.
The peculiarity of the current analysis methodology is that actual performance results are assessed in comparison with the plan and data of the previous analytical period. This type of analysis has a significant drawback - the identified reserves are forever lost opportunities for increasing production efficiency, since they relate to the previous period.
Current analysis is the most complete analysis of financial activities, incorporating the results of operational analysis and serving as the basis for long-term analysis.
Operational analysis is close in time to the moment of business transactions. It is based on primary (accounting and static) accounting data. Operational analysis is a system of daily study of the implementation of planned tasks in order to quickly intervene in the production process and ensure the efficiency of the enterprise.
Operational analysis is usually carried out according to the following groups of indicators: shipment and sales of products; use of labor, production equipment and material resources: cost; profit and profitability; solvency. During operational analysis, a study of natural indicators is carried out; relative inaccuracy is allowed in the calculations since there is no completed process.
Prospective analysis is the analysis of business results in order to determine their possible values in the future.
By revealing the picture of the future, long-term analysis provides the manager with solutions to strategic management problems.
In practical methods and research, the tasks of prospective analysis are specified by: objects of analysis; performance indicators; the best justification for long-term plans.
Prospective analysis as exploration of the future and the scientific and analytical basis of a long-term plan is closely related to forecasting, and such analysis is called predictive.
6. The importance of financial analysis in modern conditions
The modern financial system of the state consists of centralized and decentralized finance.
Finance is a set of economic monetary relations that arise in the process of production and sale of products, including the formation and use of cash income, ensuring the circulation of funds in the reproduction process, organizing relationships with other enterprises, the budget, banks, insurance organizations, etc.
Based on this, financial work at the enterprise is primarily aimed at creating financial resources for development, in order to ensure increased profitability, investment attractiveness, i.e. improving the financial condition of the enterprise.
Financial condition is a set of indicators that reflect the availability, placement and use of financial resources.
Since, the purpose of the analysis is not only and not so much to establish and evaluate the financial condition of the enterprise, but also to constantly carry out work aimed at improving it.
An analysis of the financial condition shows in which specific areas this work should be carried out and makes it possible to identify the most important aspects and weakest positions in the financial condition of the enterprise.
An assessment of the financial condition can be performed with varying degrees of detail depending on the purpose of the analysis, available information, software, technical and personnel support. The most appropriate is to separate the procedures for express analysis and in-depth analysis of financial condition.
Financial analysis makes it possible to evaluate:
Property status of the enterprise;
Degree of business risk;
Capital adequacy for current activities and long-term investments;
The need for additional sources of financing;
Ability to increase capital;
Rationality of borrowing funds;
The validity of the policy for the distribution and use of profits.
The basis of information support for the analysis of financial condition should be financial statements, which are uniform for the organization of all industries and forms of ownership.
It consists of the forms of financial statements approved by the Ministry of Finance of the Russian Federation, ordered dated March 27, 1996 No. 31 for financial statements in 1996, namely the balance sheet; report on financial results and their use - form No. 2; certificate to form No. 2 and appendices to the balance sheet, form No. 5, as well as statistical reporting on labor and cost Approved by the State Statistics Committee of the Russian Federation.
The results of financial analysis make it possible to identify vulnerabilities that require special attention and develop measures to eliminate them.
It is no secret that the process of making management decisions is more an art than a science. The result of the formalized analytical procedures performed is not, or at least should not be, the only criterion for making a particular management decision. The results of the analysis are the “material basis” of management decisions, the adoption of which is also based on the intelligence, logic, experience, personal likes and dislikes of the person making these decisions.
All this once again indicates that financial analysis in modern conditions is becoming an element of management, a tool for assessing the reliability of a potential partner.
The need to combine formalized and informal procedures in the process of making management decisions leaves its mark both on the procedure for preparing documents and on the sequence of procedures for analyzing financial condition. It is this understanding of the logic of financial analysis that is most consistent with the logic of the functioning of an enterprise in a market economy.
Financial analysis is part of a general, complete analysis of economic activity; if it is based on data only from financial statements - external analysis; On-farm analysis can be supplemented with other aspects: analysis of the efficiency of capital advances, analysis of the relationship between costs, turnover and profit, etc.
Financial analysis of the enterprise’s activities includes:
Analysis of financial condition;
Financial stability analysis;
Analysis of financial ratios:
Analysis of balance sheet liquidity;
Analysis of financial results, profitability ratios and business activity.
7. A system of indicators characterizing the financial condition of the enterprise.
Financial activity is the working language of business, and it is almost impossible to analyze the operations or results of an enterprise other than through financial indicators.
In an effort to solve specific issues and obtain a qualified assessment of the financial situation, business managers are increasingly beginning to resort to financial analysis; the value of abstract data from the balance sheet or income statement is very small if they are considered in isolation from each other. Therefore, to objectively assess the financial situation, it is necessary to move on to certain value relationships of the main factors - financial indicators or ratios.
Financial ratios characterize the proportions between various reporting items. The advantages of financial ratios are the simplicity of calculations and elimination of the influence of inflation.
It is believed that if the level of actual financial ratios is worse than the comparison base, then this indicates the most painful areas in the enterprise’s activities that require additional analysis. True, additional analysis may not confirm a negative assessment due to the specificity of specific conditions and features of the enterprise’s business policy. Financial ratios do not capture differences in accounting methods and do not reflect the quality of the constituent components. Finally, they are static in nature. It is necessary to understand the limitations of their use and treat them as an analysis tool.
For a financial manager, financial ratios are of particular importance because they are the basis for assessing his activities by external users of financial statements, shareholders and creditors. The targets of the financial analysis carried out depend on who conducts it: managers, tax authorities, owners (shareholders) of the enterprise or its creditors.
The tax authority is interested in the answer to the question of whether the enterprise is capable of paying taxes. Therefore, from the point of view of the tax authorities, the financial situation is characterized by the following indicators:
– balance sheet profit;
– return on assets = book profit as a percentage of asset value
– profitability of sales = balance sheet profit as a percentage of sales revenue;
– balance sheet profit per 1 ruble means to pay for labor.
Based on these indicators, tax authorities can determine the receipt of payments to the budget for the future.
Banks must receive an answer to the question of the solvency of the enterprise, that is, its readiness to repay borrowed funds and liquidate its assets.
Enterprise managers are primarily concerned with resource efficiency and enterprise profitability.
8. Assessment of financial stability.
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.
“Equity concentration coefficient” - 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 stable the enterprise.
“Financial dependence ratio” is the inverse of the equity capital concentration ratio. The growth of this indicator in dynamics means borrowed funds.
“Equity capital flexibility coefficient” - shows what part of equity capital is used to finance current activities, i.e. invested in working capital.
“Long-term investment structure coefficient” - the coefficient shows what part of fixed assets and other non-current assets is financed by external investors.
“Long-term borrowing ratio” – characterizes the capital structure. The higher the indicator in dynamics, the more dependent the enterprise is on external investors.
“Ratio of own and borrowed funds” - it gives a general assessment of the financial stability of the enterprise. The growth of the indicator indicates increasing dependence on external investors. (Calculation of coefficients is given in Appendix 2).
It must be said that there are no uniform normative criteria for the considered indicators. They depend on many factors: industry, lending principles, the existing structure of sources of funds, etc.
Therefore, it is better to determine the acceptability of the values of these indicators by groups of related enterprises. The only rule that “works”: the owners of the enterprise (investors and other persons who have made contributions to the authorized capital) prefer reasonable growth in the dynamics of borrowed funds, and creditors give preference to enterprises with a high share of equity capital, with greater financial autonomy.
Conclusion.
The main goal of a manufacturing enterprise in modern conditions is to obtain maximum profit, which is impossible without effective capital management. The search for reserves to increase the profitability of the enterprise is the main task of the manager.
It is obvious that the performance of the enterprise as a whole depends entirely on the efficiency of management of financial resources and the enterprise. If things at the enterprise go by themselves, and the management style does not change in new market conditions, then the struggle for survival becomes continuous.
For the financial stability of the company (enterprise), it is recommended to carry out the following activities:
First of all, it is necessary to change the attitude towards production management,
Learn new management methods and techniques,
Improve the management structure,
Self-improvement and training of staff,
Improve personnel policy,
Think over and carefully plan your pricing policy,
Find reserves to reduce production costs,
Actively engage in planning and forecasting of enterprise financial management.
Enterprises are the main links in economic management and form the basis of the economic potential of the state.
The more profitable the company, the more stable its income, the greater its contribution to the social sphere of the state, to its economic potential, and finally, the better the lives of the people working at such an enterprise.
So, the goal of my essay was achieved; it discussed the main, in my opinion, issues related to financial analysis.
Bibliography
Kovalev V.V. “Financial analysis: Capital management. Choice of investments. Analysis of reporting." - M.: Finance and Statistics, 1996. - 432s.
"Financial management: theory and practice" / Ed. Stoyanova E.S. - M.: Perspective, 1996.
Reference legal system "Garant", spring 2001.
"Big Encyclopedia of Cyril and Methodius", 2001.
Financial analysis is an important element of financial management. To ensure the effectiveness of an organization in modern conditions, management needs to be able to realistically assess the financial condition of its organization, as well as the financial condition of partners and competitors.
Financial condition– a complex concept that is characterized by a system of indicators reflecting the availability, allocation and use of the organization’s financial resources.
In practice, it often happens that a well-functioning organization experiences financial difficulties associated with insufficiently rational allocation and use of available financial resources. Therefore, financial activities should be aimed at ensuring the systematic receipt and effective use of financial resources, compliance with settlement and credit discipline, achieving a rational ratio of own and borrowed funds, financial stability for the purpose of the effective functioning of the organization. Analysis plays a significant role in achieving a stable financial position.
With the help of financial analysis, decisions are made on:
short-term financing of the organization (replenishment of current assets);
long-term financing (investment of capital in effective investment projects and equity securities);
payment of dividends to shareholders;
mobilization of reserves for economic growth (growth in sales and profits).
The main goal of financial analysis is to obtain a certain number of basic parameters that provide an objective and reasonable description of the financial condition of the organization. These are, first of all, changes in the structure of assets and liabilities, in settlements with debtors and creditors, and in the composition of profits and losses.
Main objectives of financial analysis:
determining the financial condition of the organization;
identifying changes in financial condition in space and time;
identification of the main factors causing changes in financial condition;
forecast of main trends in financial condition.
The alternativeness of the purposes of financial analysis depends on its time limits, as well as on the goals that users of financial information set for themselves.
The objectives of the study are achieved as a result of solving a number of tasks:
Preliminary review of financial statements.
Characteristics of the organization's property: non-current and current assets.
Assessment of financial stability.
Characteristics of sources of funds (own and borrowed).
Profit and profitability analysis.
Development of measures to improve the financial and economic activities of the organization.
These tasks express the specific goals of the analysis, taking into account the organizational, technical and methodological capabilities of its implementation. The main factors ultimately are the volume and quality of analytical information.
The basic principle of studying analytical indicators is the deductive method (from general to specific).
Financial analysis is part of a general, complete analysis of economic activity, which consists of two closely interrelated sections:
The financial analysis.
Management (production) analysis.
The division of analysis into financial and managerial is due to the division of the accounting system into financial and managerial accounting that has developed in practice. The main feature of the division of analysis into external and internal is the nature of the information used.
External analysis is based on published reporting data, i.e. on a very limited part of information about the activities of the organization, which is the property of the entire society. The main source of information for external analysis is the balance sheet and its annexes.
Internal analysis uses all information about the state of affairs in the organization, including that available only to a limited circle of people managing the organization’s activities.
Business activity analysis schemeorganizations
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Analysis of economic activities | |||||||||||||
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Management analysis |
The financial analysis | ||||||||||||
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Internal production analysis |
Internal financial analysis |
External financial analysis |
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Analysis in justification and implementation of business plans |
Capital Advance Efficiency Analysis | ||||||||||||
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Analysis in the marketing system |
Analysis of absolute profit indicators | ||||||||||||
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Comprehensive economic analysis of the efficiency of economic activity |
Analysis of relative profitability indicators | ||||||||||||
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Analysis of production conditions |
Analysis of liquidity, solvency and financial stability | ||||||||||||
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Analysis of the use of production resources |
Analysis of the use of equity capital | ||||||||||||
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Product volume analysis |
Analysis of the use of borrowed funds | ||||||||||||
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Product cost analysis | |||||||||||||
The division of analysis into internal and external is also related to the goals and objectives facing each of them. External analysis tasks determined by the interests of users of analytical material.
Internal financial analysis aims to a more in-depth study of the reasons for the current financial situation, the efficiency of using fixed and working capital, the relationship between indicators of production volume (sales), cost and profit. For this purpose, financial accounting data (regulatory and planning information) are additionally used as sources of information.
Purely internal is management analysis. It uses the entire range of economic information, is operational in nature and is completely subordinate to the will of the organization’s management. Only such an analysis makes it possible to really assess the state of affairs in the organization, examine the cost structure of not only all manufactured and sold products, but also its individual types, the composition of commercial and administrative expenses, and especially carefully study the nature of the responsibility of officials for the implementation of the business plan.
Management analysis data plays a decisive role in the development of the most important issues of the organization’s competitive policy: improving technology and production organization, creating a mechanism for achieving maximum profit. Therefore, the results of management analysis are not subject to publicity; they are used by the organization’s management to make management decisions, both operational and long-term.
The differences between the characteristics of financial and management analysis are presented more clearly in Table 1.
Let's look at the 12 main ratios of financial analysis of an enterprise. Due to their wide variety, it is often difficult to understand which ones are basic and which are not. Therefore, I tried to highlight the main indicators that fully describe the financial and economic activities of the enterprise.
In the activity of an enterprise, its two properties always collide: its solvency and its efficiency. If the solvency of the enterprise increases, then efficiency decreases. One can observe an inverse relationship between them. Both solvency and operational efficiency can be described by coefficients. You can focus on these two groups of coefficients, however, it is better to split them in half. Thus, the Solvency group is divided into Liquidity and Financial Stability, and the Enterprise Efficiency group is divided into Profitability and Business Activity.
We divide all financial analysis ratios into four large groups of indicators.
- Liquidity ( short-term solvency),
- Financial stability ( long-term solvency),
- Profitability ( financial efficiency),
- Business activity ( non-financial efficiency).
The table below shows the division into groups.
In each group we will select only the top 3 coefficients, in the end we will get a total of 12 coefficients. These will be the most important and main coefficients, because in my experience they are the ones that most fully describe the activities of the enterprise. The remaining coefficients that are not included in the top, as a rule, are a consequence of these. Let's get down to business!
Top 3 liquidity ratios
Let's start with the golden three of liquidity ratios. These three ratios provide a complete understanding of the liquidity of the enterprise. This includes three coefficients:
- Current ratio,
- Absolute liquidity ratio,
- Quick ratio.
Who uses liquidity ratios?
The most popular among all ratios, it is used primarily by investors in assessing the liquidity of an enterprise.
Interesting for suppliers. It shows the company’s ability to pay its counterparties-suppliers.
Calculated by lenders to assess the quick solvency of an enterprise when issuing loans.
The table below shows the formula for calculating the three most important liquidity ratios and their standard values.
|
Odds |
Formula | Calculation |
Standard |
|
| 1 | Current ratio |
Current ratio = Current assets/Current liabilities |
Ktl= p.1200/ (p.1510+p.1520) |
|
| 2 | Absolute liquidity ratio |
Absolute liquidity ratio = (Cash + Short-term financial investments) / Current liabilities |
Cable = page 1250/(p.1510+p.1520) | |
| 3 | Quick ratio |
Quick ratio = (Current assets - Inventories) / Current liabilities |
Kbl= (p.1250+p.1240)/(p.1510+p.1520) |
Top 3 financial stability ratios
Let's move on to consider the three main factors of financial stability. The key difference between liquidity ratios and financial stability ratios is that the first group (liquidity) reflects short-term solvency, and the latter (financial stability) reflects long-term solvency. But in fact, both liquidity ratios and financial stability ratios reflect the solvency of an enterprise and how it can pay off its debts.
- Autonomy coefficient,
- Capitalization rate,
- Provision ratio of own working capital.
Autonomy coefficient(financial independence) is used by financial analysts for their own diagnostics of their enterprise for financial stability, as well as by arbitration managers (in accordance with the Decree of the Government of the Russian Federation of June 25, 2003 No. 367 “On approval of the rules for conducting financial analysis by arbitration managers”).
Capitalization rate important for investors who analyze it to evaluate investments in a particular company. A company with a large capitalization ratio will be more preferable for investment. Too high values of the coefficient are not very good for the investor, since the profitability of the enterprise and thereby the income of the investor decreases. In addition, the coefficient is calculated by lenders; the lower the value, the more preferable it is to provide a loan.
recommendatory(according to the Decree of the Government of the Russian Federation of May 20, 1994 No. 498 “On some measures to implement legislation on the insolvency (bankruptcy) of an enterprise", which became invalid in accordance with Decree 218 of April 15, 2003) is used by arbitration managers. This ratio can also be attributed to the Liquidity group, but here we will assign it to the Financial Stability group.
The table below presents the formula for calculating the three most important financial stability ratios and their standard values.
|
Odds |
Formula | Calculation |
Standard |
|
| 1 | Autonomy coefficient |
Autonomy ratio = Equity/Assets |
Kavt = page 1300/p.1600 | |
| 2 | Capitalization rate |
Capitalization ratio = (Long-term liabilities + Short-term liabilities)/Equity |
Kcap=(p.1400+p.1500)/p.1300 | |
| 3 | Provision ratio of own working capital |
Working capital ratio = (Equity capital - Non-current assets)/Current assets |
Kosos=(p.1300-p.1100)/p.1200 |
Top 3 profitability ratios
Let's move on to consider the three most important profitability ratios. These ratios show the effectiveness of cash management at the enterprise.
This group of indicators includes three coefficients:
- Return on assets (ROA),
- Return on equity (ROE),
- Return on Sales (ROS).
Who uses financial stability ratios?
Return on assets ratio(ROA) is used by financial analysts to diagnose the performance of a business in terms of profitability. The ratio shows the financial return from the use of the enterprise's assets.
Return on equity ratio(ROE) is of interest to business owners and investors. It shows how effectively the money invested in the enterprise was used.
Return on sales ratio(ROS) is used by the sales manager, investors and the owner of the enterprise. The coefficient shows the efficiency of sales of the main products of the enterprise, plus it allows you to determine the share of cost in sales. It should be noted that what is important is not how many products the company sold, but how much net profit it earned from these sales.
The table below shows the formula for calculating the three most important profitability ratios and their standard values.
|
Odds |
Formula | Calculation |
Standard |
|
| 1 | Return on assets (ROA) |
Return on assets ratio = Net profit / Assets |
ROA = p.2400/p.1600 |
|
| 2 | Return on equity (ROE) |
Return on Equity Ratio = Net Profit/Equity |
ROE = line 2400/line 1300 | |
| 3 | Return on Sales (ROS) |
Return on Sales Ratio = Net Profit/Revenue |
ROS = p.2400/p.2110 |
Top 3 business activity ratios
Let's move on to consider the three most important coefficients of business activity (turnover). The difference between this group of coefficients and the group of Profitability coefficients is that they show the non-financial efficiency of the enterprise.
This group of indicators includes three coefficients:
- Accounts receivable turnover ratio,
- Accounts payable turnover ratio,
- Inventory turnover ratio.
Who uses business activity ratios?
Used by the CEO, commercial director, head of sales, sales managers, financial director and financial managers. The coefficient shows how effectively the interaction between our enterprise and our counterparties is structured.
It is used primarily to determine ways to increase the liquidity of an enterprise and is of interest to the owners and creditors of the enterprise. It shows how many times in the reporting period (usually a year, but it can also be a month or a quarter) the company repaid its debts to creditors.
Can be used by commercial director, head of sales department and sales managers. It determines the efficiency of inventory management in an enterprise.
The table below presents the formula for calculating the three most important business activity ratios and their standard values. There is a small point in the calculation formula. The data in the denominator are usually taken as averages, i.e. The value of the indicator at the beginning of the reporting period is added up with the end one and divided by 2. Therefore, in the formulas, the denominator is 0.5 everywhere.
|
Odds |
Formula | Calculation |
Standard |
|
| 1 | Accounts receivable turnover ratio |
Accounts Receivable Turnover Ratio = Sales Revenue/Average Accounts Receivable |
Code = p.2110/(p.1230np.+p.1230kp.)*0.5 | dynamics |
| 2 | Accounts payable turnover ratio |
Accounts payable turnover ratio= Sales revenue/Average accounts payable |
Kokz=p.2110/(p.1520np.+p.1520kp.)*0.5 |
dynamics |
| 3 | Inventory turnover ratio |
Inventory Turnover Ratio = Sales Revenue/Average Inventory |
Koz = line 2110/(line 1210np.+line 1210kp.)*0.5 |
dynamics |
Summary
Let's summarize the top 12 ratios for the financial analysis of an enterprise. Conventionally, we have identified 4 groups of enterprise performance indicators: Liquidity, Financial stability, Profitability, Business activity. In each group, we have identified the top 3 most important financial ratios. The resulting 12 indicators fully reflect all financial and economic activities of the enterprise. It is with their calculation that financial analysis should begin. A calculation formula is provided for each coefficient, so you will not have any difficulties calculating it for your enterprise.
