Solvency in a general sense, according to V.V. Kovaleva This is the company’s ability to fulfill its payment calendar without violations. In other words, this is the presence of cash and cash equivalents at the enterprise sufficient to repay accounts payable that require immediate payment. In this case, cash equivalents are understood as short-term, highly liquid investments that are easily convertible into cash and are subject to an insignificant risk of changes in value, with a placement period usually not exceeding 3 months. In international practice, overdraft lending is also classified as cash equivalents.
HELL. Sheremet believes that the provision of reserves with sources of formation is the essence of the financial stability of an enterprise, and solvency is its external manifestation.
O.V. Efimova proposes to use data from the “Cash Flow Statement” form to calculate indicators characterizing solvency and identifies the solvency ratio and the Beaver ratio.
The source of information for analyzing the solvency of an enterprise is the balance sheet (Form No. 1). The main purpose of the analysis of the balance sheet is defined as the assessment of the enterprise's assets, its liabilities, and equity capital. To form this assessment, it is necessary to analyze the structure of the property and liabilities of the enterprise, determine the degree of liquidity of the balance sheet, calculate and evaluate financial solvency ratios and financial stability.
In international practice, the practice of calculating instant, short-term, long- and medium-term solvency is widespread.
1) "Instant" solvency means the same as liquidity, since the term “liquidity” characterizes the ability of an enterprise to timely pay its short-term obligations. When calculating “instant” solvency, liquid assets are compared with accounts payable with a maturity of up to one year.
2) For evaluation short-term solvency Current assets are compared to creditors with maturities of up to one year. In Russian practice, this is the current liquidity ratio.
3) For evaluation long- and medium-term solvency determine: positive net capital (net assets of the organization); ratio of debt and equity capital (financial leverage ratio); interest coverage; loan repayment schedule.
Thus, the methods used in international practice for assessing instantaneous and short-term solvency are adequate to the methods for calculating liquidity indicators in Russian practice.
In educational and methodological literature on financial analysis, theorists' opinions regarding the concept of solvency and its assessment often differ. Most authors are of the view that solvency is determined mainly by the degree of liquidity of the organization, therefore, when analyzing solvency, it is recommended to evaluate liquidity ratios.
The degree of solvency of a company is shown by liquidity ratios.
According to the methodological guidelines for analyzing the financial condition of organizations (order of the FSFO of Russia dated January 23, 2001 No. 16), the coefficients characterizing the solvency of an organization are: general degree of solvency; debt ratio for bank loans and loans; debt ratio to other organizations; debt ratio to the fiscal system; domestic debt ratio; degree of solvency for current obligations; current liabilities coverage ratio with current assets.
Let us consider separately in more detail several indicators of solvency described in the Methodological Regulations for assessing the financial condition of enterprises and establishing an unsatisfactory balance sheet structure, approved by the order of the Federal Fund for Financial Affairs dated August 12, 1994 No. 31-r (currently cancelled).
Solvency recovery ratio an indicator showing the possibility of restoring normal current liquidity of an enterprise within 6 months after the reporting date.
The solvency recovery ratio is defined as the ratio of the calculated current liquidity ratio to its established value.
The formula for calculating the coefficient is:
Kvp = [K1ph + 6/T(K1ph - K1n)] / K1norm
Where,
K1f - the actual value (at the end of the reporting period) of the current liquidity ratio;
K1n - the value of the current liquidity ratio at the beginning of the reporting period;
K1norm - standard value of the current liquidity ratio, K1norm = 2;
6 - period of restoration of solvency in months;
T - reporting period in months.
If the value of the coefficient is greater than 1, calculated for a period of 6 months, then this indicates that the enterprise has a real opportunity to restore its solvency.
If the value of the indicator is less than 1, then the enterprise has no real opportunity to restore solvency in the near future.
Loss of solvency ratio This is a coefficient showing the likelihood of a deterioration in the organization's current liquidity indicator over the next three months after the reporting date.
The loss of solvency ratio is defined as the ratio of the calculated current liquidity ratio to its established value.
Kup = [K1f + 3/T(K1f - K1n)] / K1norm
The coefficient of loss of solvency, taking a value greater than 1, calculated for a period of 3 months, indicates that the enterprise has a real opportunity not to lose solvency.
If the value of the indicator is less than 1, calculated for a period of 3 months, then this indicates that the enterprise has the possibility of losing its solvency in the near future.
The loss of solvency ratio is an indicator that characterizes the probability of a decrease in current liquidity within the next 3 months from the date on which the statements were prepared.
To calculate it, it is enough to know only .
Calculation formula (according to reporting)
(Ktl.con. + 3 / T * (Ktl.kon. - Ktl.start)) / Ktl.norm.,
Ktl.kon. — the value of the current liquidity ratio at the end of the reporting period;
Ktl.beg. — current ratio at the beginning of the reporting period;
Ktl.norm. — standard value of the current liquidity ratio; K1norm = 2;
Number 3 - period for calculating the risk of loss of solvency of the enterprise, in months;
T - reporting period in months, usually the number 12.
Standard
Conclusions about what a change in indicator means
If the indicator is higher than normal
There is no risk of loss of solvency in the next 3 months.
If the indicator is below normal
A risk of loss of solvency has been detected. Given the dynamics of the current liquidity ratio that have developed since the beginning of the reporting period, after 3 months its value may drop below 2, becoming unsatisfactory.
If the indicator increases
Positive factor
If the indicator decreases
Negative factor
Notes
The indicator in the article is considered from the point of view not of accounting, but of financial management. Therefore, sometimes it can be defined differently. It depends on the author's approach.
In most cases, universities accept any definition option, since deviations according to different approaches and formulas are usually within a maximum of a few percent.
The indicator is considered in the main free service and some other services
If you see any inaccuracy or typo, please also indicate this in the comment. I try to write as simply as possible, but if something is still not clear, questions and clarifications can be written in the comments to any article on the site.
Best regards, Alexander Krylov,
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The solvency recovery coefficient indicates the probability of the enterprise returning to a solvent state. It helps to draw conclusions about the company's current financial condition and its balance sheet structure.
Arbitration managers effectively use this indicator to determine the possibility of bankruptcy of an organization in the future. The check begins with the coefficient of solvency restoration, general liquidity and security of the fixed assets.
Solvency
Before analyzing the solvency ratio, it is necessary to define the concept of “solvency”. In economics, it is understood as the company’s ability to fully and timely respond to its obligations to borrowers. A decrease in solvency increases the risk of bankruptcy of a company. Using the ratio, you can determine the quantitative value of the financial condition.
To pay off loans and liabilities, management can use not only cash, but also various assets with varying degrees of liquidity. Solvency is determined by several factors:
- availability of assets;
- level of realizability (liquidity) of assets.
Asset structure
The assets of an enterprise are usually divided into two types:
- current- assets that are converted into money during a production cycle, usually 12 months;
- permanent- the main means of production that are not absorbed in production itself.
It is customary to rank the company's assets according to the degree of liquidity - the speed of sale and conversion into free cash for settlements. Solvency is directly proportional to the volume of highly liquid assets:
- Highly liquid assets. This group of assets A1 consists of current assets with the highest rate of conversion into money. In practice, these include cash, securities, and short-term financial investments.
- Quickly realizable assets (A2) are current assets that can be quickly converted into cash. These are accounts receivable up to 1 year, bank deposits.
- Slowly selling assets (A3) include accounts receivable for more than 12 months, raw materials, work in progress, inventory, semi-finished products, VAT credit.
- Hard-to-sell assets (A4): structures and buildings, land, transport, intangible assets (trademarks, patents).
Liquidity
Liquidity- the company’s ability to repay loan debt in a shortened time due to the rapid sale of assets. Each company has its own indicator value, which periodically decreases or increases.
Liquidity will be divided into:
- Urgent- rapid conversion of receivables into cash. The calculation of the coefficient consists of determining the ratio of the difference between the assets involved in the turnover and the size of long-term debts with the debts of the founders to short-term loans. If the value is up to 1, the company lacks economic stability. The quick liquidity ratio helps to judge the likelihood of settling debts with creditors with highly liquid assets. The calculation looks like:
Kbl = (A1+A2)/(P1+P2)
The standard value for this type of coefficient is 0.7-0.8.
- Current. Calculated at the beginning and end of the period. Typically, it is the ratio of total assets to the company's total performance (liabilities). The total liquidity ratio is used to assess the ability to repay borrowed loans with current assets. It shows the relationship of various debts to available cash. The formula represents the ratio of the difference in current assets and inventories to the amount of liabilities in a specified period of time - a quarter, a year. The current liquidity ratio helps to judge the organization's ability to pay off existing obligations with its own current assets. The formula for calculation is:
Ktl = (A1+A2+A3)/(P1+P2)
The limit value is considered to be 2. If Ktl is greater than it, then the financial condition of the company is stable. The optimal level will depend on the type of activity. When analyzing, you should rely not only on the standard value, but also on the industry average.
- Absolute. It combines both previous coefficients and conveys their meaning simultaneously. The absolute liquidity ratio indicates the ability to pay creditors for short-term obligations with its highly liquid assets. Formula:
Cable = A1/(P1+P2)
- General. The general liquidity indicator allows us to talk about the organization’s ability to pay off its obligations with all its assets. The indicator simultaneously takes into account short-term and long-term debt. It is equal to the ratio of the weighted sum of assets to liabilities:
Number = (A1+1/2A2+1/3A3)/(P1+1/2P2+1/3P3)
The optimal option is considered when Col > 1.
Previously, the law on declaring an organization bankrupt required the use of 3 coefficients for assessment: the coefficient of restoration of solvency, as well as the coefficient of current liquidity and equity.
Balance sheet liquidity
Balance sheet liquidity is considered to be the company's ability to cover existing liabilities with assets with a period of transfer into the money supply that is shorter than the maturity of the liabilities.
An absolutely liquid balance will be provided that the following conditions are met:
- A1=>P1 - the most liquid assets are comparable to the size of current liabilities or completely cover them;
- A2=>P2 - quickly realizable assets are comparable to short-term liabilities or exceed them;
- A3=>P3 - slowly realizable assets exceed or equal long-term liabilities;
- A4=>P4 - hard-to-sell assets are comparable to or greater than permanent liabilities.
Compliance with any three conditions automatically leads to the fulfillment of the fourth. The following ratio is also true:
- A1+A2+A3=>P1+P2+P3
- A4=<П4
This inequality has a deep economic meaning: if permanent liabilities exceed hard-to-sell assets, then the main condition of solvency is met - the organization has its own working capital to ensure an uninterrupted reproduction process; if permanent liabilities are comparable to hard-to-sell assets, then the lower limit of solvency with the organization’s own funds has been reached.
Differences between creditworthiness and solvency
Solvency and creditworthiness are closely interrelated, but are not one concept. The main difference: solvency is the ability to meet obligations with all types of assets, and creditworthiness is only medium-term or short-term assets without permanent assets (land, transport, real estate). If an enterprise begins to repay debts with permanent or slowly selling assets, then its production capacity decreases. This leads to a decrease in long-term financial stability.
Determination of solvency
The FUND bodies use three leading indicators to determine solvency:
- Coverage ratio. It characterizes the security of fixed assets for the effective organization of economic activities and the correct repayment of urgent obligations. The indicator is equal to the ratio of the actual cost of fixed assets (produced inventories, cash, accounts receivable, finished goods) to existing current liabilities (short-term loans, accounts payable, loans).
- Own funds ratio. It indicates the presence of own working capital, which guarantees financial stability. The coefficient is determined as the ratio of the difference in the volumes of sources of own funds, the physical cost of fixed assets and other non-current assets of the enterprise to the total cost of available working capital as inventories, work in progress, cash, finished products and receivables.
- The coefficient of recovery and loss of solvency, which is worth considering separately.
The balance sheet structure can be called unsatisfactory, and the organization can be called insolvent if the following conditions are met:
- the coverage ratio at the end of the period is less than 2;
- the personal funds ratio at the end of the year is below 0.1.
Economists are of the opinion that the limit value of the coverage ratio is greatly overestimated - many companies have a ratio value of less than 2, but show good solvency.
The recognition of an organization as insolvent by FUDN does not indicate its insolvency and will not cause the appearance of civil liability of its owner. This will be a recorded state of instability. Critical values are set to ensure control over the financial situation and take timely measures to prevent insolvency. Management must strive to independently overcome a negative situation.
If one of the two indicators is less than the minimum value, then proceed to finding the solvency restoration coefficient.
It shows the company's ability to return to an acceptable level of current liquidity in the next six months. The indicator is described in detail in many methodological publications on economics.
Squareplate = (Ktl + 6*(Ktl-Ktln)/T)/Knorm
- Ktl- current ratio
- Ktln- initial current liquidity in the conditional period;
- Knorm- standard indicator of current liquidity, adopted 2;
- T- duration of the reporting period, calculated in months.
If the value exceeds 1, then the company is able to return to normal solvency within six months. If the value is up to 1, then the company does not have enough funds for this.
This method is not accurate, since the formula uses only two current liquidity indicators at the end and beginning of the reporting period. Such a calculation has a mathematical probability of only 50%.
The most accurate analysis will be based on current liquidity for the shortest period. The main period is divided into many small ones and calculations are made in Excel using a graph and special built-in functions.
Loss of solvency ratio
It allows you to judge the risks of deterioration in the solvency of a legal entity in the next 3 months:
Squareplate = (Ktl + 3*(Ktl-Ktln)/T)/Knorm
The solvency recovery coefficient is not considered an accurate indicator for forecasting the dynamics of solvency, since it is based on the trend of only two periods.
Activity analysis
It is possible to find out about the financial condition of an organization even with a minimal set of data. This is why coefficients are given great importance. They indicate any errors. For example, if the solvency ratio is insufficient, they speak of bankruptcy or a special deterioration in work to begin bankruptcy proceedings. Fictitious bankruptcy helps avoid paying off large debts.
A low current stability ratio indicates financial instability. A similar conclusion can be drawn in the absence of a constant value of the indicator.
After a couple of miscalculations, a financial analyst will know all the financial details and its prospects about the company. It is necessary to constantly independently monitor solvency indicators.
The ratio allows you to find out your financial condition and engage in effective planning. For example, a company produces a certain product, and every quarter it determines the solvency ratio values to determine future work.
The plant management is obliged to monitor the timely fulfillment of its obligations. Using a low ratio, you can determine in advance that in the coming period there will be no funds to pay accounts payable. This will allow you to take action in advance and refrain from making new commitments.
Investors and partners have more confidence if the indicator values are higher than normal. Many suppliers simply refuse to work with organizations that have a low solvency ratio, as there is a high risk of not receiving payment for the supplied raw materials. As the coefficient value increases, the level of confidence increases.
Managers can assess the correct use of borrowed funds and the possibility of repayment. If, after receiving several loans, the ratio has not increased, then the funds are being used ineffectively or have simply been diverted.
If there is a reason to recognize the balance sheet structure of a legal entity as unsatisfactory, but there is a real opportunity to restore solvency within a certain time frame, then they decide to postpone consideration of recognizing the company’s balance sheet structure as unsatisfactory, and the company itself as insolvent.
If there are grounds for recognizing the structure of a legal entity’s balance sheet at an enterprise as unsatisfactory when taking into account the squared fees. not found, then accept one of 2 conditions:
- the solvency restoration coefficient is above 1 - it is impossible to recognize the legal entity as insolvent, and its balance sheet structure is unsatisfactory;
- the coefficient of restoration of solvency is up to 1, then the decision on loss of solvency is not made, but it is placed on temporary registration with the relevant body of the Fund.
Similar decisions apply to federal state enterprises or legal entities with a state share of more than 25%. For enterprises based on state ownership or with a previously agreed share of ownership, the Fund may apply the measures listed above if there is a delegation of rights to it by municipal authorities.
The FUND is preparing an opinion on behalf of arbitration courts on assessing the structure of the balance sheet and its financial condition for the company. To do this, the coefficients listed above are always used. After a decision on insolvency or unsatisfactory balance sheet structure, the management of the enterprise is sent a request for additional information and a detailed analysis of its financial condition.
Calculation example
For a better understanding, determine the solvency of the organization OJSC "Luchik". Over the past year, current liquidity has changed from 0.97 to 1.18. Let’s make the calculation for a standard period of six months:
Squareplate =1.18+6/12(1.18-0.97) - 0.3528.
This result suggests that the growth of solvency at the enterprise is occurring at a slow pace, but under certain conditions the situation can be improved. It is important to understand: the result obtained is not accurate and may be erroneous.
Ways to restore solvency
Any founder has at least once encountered the inability to meet their obligations. Such a case is called bankruptcy. If this happens, then you shouldn’t give up; you can get out of any situation.
An approximate algorithm of actions that will allow you to avoid official bankruptcy:
- If you have large debts, it is worth talking with creditors about refinancing for a period acceptable to both parties. You can also negotiate preferential payments.
- Take out a new loan to pay off old debts. But you should not abuse such advice, because... this leads to a debt trap.
- Lay off 50% of workers who are a burden in this situation.
- Monitor your budget carefully. It is always possible to reduce production and administrative costs.
- Sell unnecessary property.
- In large organizations, an inventory of property should be carried out.
- Reduce product costs as much as possible and increase production volumes.
If the above recommendations do not help, then you need to start preparing the company for bankruptcy. At the same time, you can register a new legal entity under the old brand. You should be especially careful and comply with all legal requirements; there is a high risk of being brought to subsidiary liability for fictitious bankruptcy.
A good option would be to resort to the services of an anti-crisis specialist. He will not have feelings of bias and an emotional component, which will allow him to adequately assess the situation and help the company stay afloat.
The coefficient of restoration or loss of solvency allows you to determine the likelihood of a legal entity returning to solvency in the near future. It is used for express diagnostics of the economic condition of the company.
2.1. The main indicator characterizing whether an enterprise has a real opportunity to restore (or lose) its solvency during a certain period is the coefficient of restoration (loss) of solvency.
If at least one of the coefficients listed in section I has a value less than those specified in paragraph 1.2, the solvency restoration coefficient is calculated for a period set at 6 months.
If the current liquidity ratio is greater than or equal to 2, and the equity ratio is greater than or equal to 0.1, the loss of solvency ratio is calculated for a period set to 3 months.
2.2. The solvency recovery ratio is determined by formula (3.a) as the ratio of the calculated current liquidity ratio to its established value. The estimated current liquidity ratio is defined as the sum of the actual value of the current liquidity ratio at the end of the reporting period and the change in the value of this ratio between the end and the beginning of the reporting period in terms of the period of restoration of solvency, set equal to 6 months.
K1f + 6 / T(K1f - K1n) K3 = ────────────────────── , (3.a) 2 reporting period; liquidity, K1norm = 2; 6 - period of restoration of solvency in months;The solvency restoration coefficient, taking a value greater than 1, calculated for a period of 6 months, indicates that the enterprise has a real opportunity to restore its solvency.
The solvency restoration coefficient, taking a value less than 1, calculated for a period of 6 months, indicates that the enterprise has no real opportunity to restore solvency in the near future.
2.3. The loss of solvency ratio is determined by formula (3.b) as the ratio of the calculated current liquidity ratio to its established value. The calculated current ratio is defined as the sum of the actual value of the current ratio at the end of the reporting period and the change in the value of this ratio between the end and the beginning of the reporting period in terms of the period of loss of solvency, set equal to 3 months.
K1f + 3/T(K1f - K1n) K3 = ──────────────────── , (3.b) K1norm where: K1f - actual value (at the end of the reporting period) current liquidity ratio (K1); K1n - the value of the current liquidity ratio at the beginning reporting period; K1norm - standard value of the current coefficient liquidity; K1norm = 2; 3 - period of loss of solvency of the enterprise in months; T - reporting period in months.An indicator of the possibility of an enterprise losing its solvency within a certain period of time.
Loss of solvency coefficient - what it shows
Loss of solvency ratio- shows the probability of deterioration in the current liquidity indicator of the enterprise over the next 3 months after the reporting date.
Loss of solvency coefficient - formula
General formula for calculating the coefficient
K tl beginning - current liquidity ratio at the beginning of the reporting period; K tl con - current liquidity ratio at the end of the reporting period; T - analyzed period in months; 3 - period of loss of solvency in months; K tl norms - the standard value of the current liquidity ratio. Typically set to 2, but can range from 1 to 2.5
Traditionally, the period of loss of solvency is taken to be 3 months. This value can take other values. In this case, the recovery coefficient will indicate whether the enterprise has the opportunity to lose or not lose solvency during this period.
Loss of solvency ratio - value
The coefficient of loss of solvency, taking a value greater than 1, calculated for a period of 3 months, indicates that the enterprise has a real opportunity not to lose solvency. The higher the value is 1, the better the financial condition of the organization.
The coefficient of loss of solvency, taking a value less than 1, calculated for a period of 3 months, indicates that the enterprise has the possibility of losing solvency in the near future.
The value of the coefficient should not be interpreted unambiguously. It indicates a possible improvement or deterioration in the solvency of the enterprise over the selected time period of analysis. For a more accurate result, you need to take a larger time period and divide it into more parts. In this case, a more detailed idea of the change in the coefficient will be formed, and accordingly it is possible to more accurately predict the change in solvency while maintaining the operating conditions of the enterprise that corresponded to the analyzed time period.
Average statistical values by year for Russian enterprises
| Revenue amount | Values by year, rel. units | ||||||
| 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | |
| Microenterprises (revenue< 10 млн. руб.) | 0.456 | 0.533 | 0.504 | 0.519 | 0.466 | 0.503 | 0.507 |
| Mini-enterprises (10 million rubles ≤ revenue< 120 млн. руб.) | 0.556 | 0.579 | 0.546 | 0.536 | 0.552 | 0.533 | 0.542 |
| Small enterprises (RUB 120 million ≤ revenue< 800 млн. руб.) | 0.619 | 0.599 | 0.551 | 0.589 | 0.575 | 0.591 | 0.625 |
| Medium-sized enterprises (RUB 800 million ≤ revenue< 2 млрд. руб.) | 0.616 | 0.595 | 0.629 | 0.611 | 0.610 | 0.640 | 0.656 |
| Large enterprises (revenue ≥ 2 billion rubles) | 0.698 | 0.671 | 0.652 | 0.690 | 0.658 | 0.652 | 0.679 |
| All organizations | 0.665 | 0.632 | 0.613 | 0.637 | 0.615 | 0.621 | 0.647 |
Table values are calculated based on Rosstat data
The standard value of the current ratio was equal to 2.
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- Rules for conducting financial analysis by an arbitration manager No. 1, calculated quarterly for at least a 2-year period preceding the initiation of bankruptcy insolvency proceedings, as well as for the period of bankruptcy proceedings against the debtor and the dynamics of their changes and reasons for loss solvency
- Current issues and modern experience in analyzing the financial condition of organizations - part 8 The documents containing the analysis of the financial condition of the debtor indicate a the date and place of its conduct, b surname, first name, patronymic of the arbitration manager, name and location of the self-regulatory organization of arbitration managers of which he is a member, c the name of the arbitration court in whose proceedings there is an insolvency case pending bankruptcy of the debtor case number date and number of the judicial act on the introduction of bankruptcy proceedings against the debtor date and number of the judicial act on the approval of the arbitration manager d full name location codes of the debtor's industry d coefficients of the debtor's financial and economic activities and indicators used for their calculation according to Appendix 1, calculated quarterly for at least a two-year period preceding the initiation of insolvency proceedings, as well as for the period of bankruptcy proceedings against the debtor and the dynamics of their changes and reasons for loss solvency taking into account the dynamics of changes in the coefficients of financial and economic activity and the results of the analysis of economic investment and
- Solvency restoration coefficient Solvency restoration coefficient - characterizing the ability of an enterprise to restore or lose solvency within a certain time, the Solvency restoration coefficient is calculated in the FinEkAnalysis program in the block... T - period in months 6 - recovery period solvency in months Ktl norms - standard value current liquidity ratio Usually taken equal to 2,
