Use the balance sheet to examine a company's financial position at a particular point in time by looking at how it balances assets, liabilities, and shareholders' equity.
- The basic balance sheet equation is: Assets = Liabilities + Equity
- Assets. Remember that assets give value to a business. The quality of asset management can be determined by assessing how they are distributed between cash, accounts receivable, short-term and long-term investments, inventories, fixed assets, structures, land, and buildings. In doing so, you will be able to understand whether the business is able to maintain and grow its operations, or whether it will close.
- Obligations. Liabilities represent all of the company's borrowings. Borrowing is one way to obtain funds to support operations. The liabilities section will also tell you the amount owed to suppliers and contractors, bills payable, and other types of accounts payable. It is often the case (in certain situations, of course) that a high leverage ratio can be a sign that a company is in trouble and is unable to maintain its own operations.
Capital. Capital represents the company's own funds. It is the main source of funds to maintain business operations. When reviewing the capital division, look at the number of common and preferred shares issued. Using the capital sections you will be able to assess the real value of the business from the point of view of its owners. An impressive net worth can serve as an indicator of a business's ability to continue operating and grow. The opposite situation indicates the presence of problems and the likelihood of business closure. There are two methods of preparing a cash flow statement: direct and indirect.
- The direct method summarizes the receipt and use of funds in the reporting period.
- The indirect method involves adjusting net income for transactions that affected it, but did not affect the amount of cash.
Check the statement of shareholders' equity for more detailed information about changes in the equity section of the balance sheet during the reporting period.
You will be able to see how many shares are allowed for issue and how many of them are actually issued. In this report you can see the changes that have occurred in the items of ordinary shares, preferred shares, additional capital and retained earnings.
An expert in the collection of debts of legal entities, Elena Gerasimova, not all creditors collect data on the reliability of the companies with which they plan to sign an agreement, but this must be done in relation to each potential counterparty.
- List of simple but necessary actions to check a counterparty
- On the page “Business risks: check yourself and your counterparty” on the website of the Federal Tax Service of Russia, find out:
- whether bankruptcy proceedings are underway, or whether reorganization/liquidation of the enterprise has been initiated;
- whether the contractor is a tax evader;
- Isn’t his legal address listed as one of hundreds of “fly-by-night companies?”
- Get an EXTRACT from the Unified State Register of Legal Entities. The extract will allow you to determine how long the company has been operating on the market, who are the founders of the company and who is the sole management body of the company, which has the right to act without a power of attorney.
- In addition to the tax authorities’ website, you should definitely visit:
- website of bailiffs to make sure that enforcement proceedings are not being carried out against the person of interest, and if so, to determine the amount of claims brought against him;
- CARD FILE of arbitration cases, in order to find out who is suing your potential partner and why;
- REGISTER of unscrupulous suppliers in the Unified Information System in the field of procurement, in order to find out whether the counterparty has evaded fulfilling its obligations under government contracts;
If the information collected regarding the counterparty allows us to draw a conclusion about its supposed reliability, attention should also be paid to the requirements imposed by law on the transaction itself:
- request from the counterparty the charter and balance sheet as of the last reporting date. The Charter will specify the procedure for approving a major transaction; using the balance sheet for the last reporting date, we will find out the size of the company’s assets in order to determine the size of the transaction for a given partner. According to Art. 46 of the Federal Law “On Limited Liability Companies”, a transaction related even to the indirect possibility of alienation of property, the price of which is more than 25% of the total capital of the LLC, will be considered large. For example, when checking the balance sheet for the 3rd quarter of 2015, it was revealed that assets amount to 100 million rubles. Then any transaction worth more than 25 million rubles that is not related to ordinary business activities must be approved by the founder of the LLC in writing. For JSCs, a similar procedure for approval of major transactions by shareholders is established by Art. 79 of Law No. 208-FZ.”
- if a transaction is signed by power of attorney, it is necessary to determine whether the person signing the agreement has the authority to conclude it, as well as the validity period of such authority.
For significant transaction amounts, experts recommend checking information about the counterparty more than once when concluding an agreement, but monitoring the “state of affairs” with a certain frequency. This will allow you to identify a problem with non-payments at an early stage and take appropriate measures.
Let's consider the concept, calculation formula and economic meaning of the company's net assets.
Net assets
Net assets (EnglishNetAssets) – reflect the real value of the enterprise’s property. Net assets are calculated by joint stock companies, limited liability companies, state-owned enterprises and supervisory authorities. The change in net assets allows you to assess the financial condition of the enterprise, solvency and level of bankruptcy risk. The methodology for assessing net assets is regulated by legislation and serves as a tool for diagnosing the risk of bankruptcy of companies.
Net asset value. Calculation formula
The assets include non-current and current assets, with the exception of the debt of the founders for contributions to the authorized capital and the costs of repurchasing their own shares. Liabilities include short-term and long-term liabilities excluding deferred income. The calculation formula is as follows:
NA – the value of the enterprise’s net assets;
A1 – non-current assets of the enterprise;
A2 – current assets;
ZU – debts of the founders for contributions to the authorized capital;
ZBA – costs of repurchasing own shares;
P2 – long-term liabilities
P3 – short-term liabilities;
DBP – deferred income.
The amount of net assets is calculated based on the balance sheet data (Form No. 1), and the formula is as follows:
Example of calculating the net asset value of a business in Excel
Let's consider an example of calculating the value of net assets for the organization OJSC Gazprom. To estimate the value of net assets, it is necessary to obtain financial statements from the official website of the company. The figure below highlights the balance sheet lines necessary to estimate the value of net assets; the data is presented for the period from the 1st quarter of 2013 to the 3rd quarter of 2014 (as a rule, the assessment of net assets is carried out annually). The formula for calculating net assets in Excel is as follows:
Net assets=C3-(C6+C9-C8) 
Video lesson: “Calculation of net assets”
Net asset analysis is carried out in the following tasks:
- Assessment of the financial condition and solvency of the company (see → “ “).
- Comparison of net assets with authorized capital.
Solvency assessment
Solvency is the ability of an enterprise to pay for its obligations on time and in full. To assess solvency, firstly, a comparison is made of the amount of net assets with the size of the authorized capital and, secondly, an assessment of the trend of change. The figure below shows the dynamics of changes in net assets by quarter.
Analysis of the dynamics of changes in net assets
Solvency and creditworthiness should be distinguished, since creditworthiness shows the ability of an enterprise to pay off its obligations using the most liquid types of assets (see →). Whereas solvency reflects the ability to repay debts both with the help of the most liquid assets and those that are slowly sold: machines, equipment, buildings, etc. As a result, this may affect the sustainability of the long-term development of the entire enterprise as a whole.
Based on the analysis of the nature of changes in net assets, the level of financial condition is assessed. The table below shows the relationship between the trend in net assets and the level of financial health.
Comparison of net assets with authorized capital
In addition to the dynamic assessment, the amount of net assets for an OJSC is compared with the size of the authorized capital. This allows you to assess the risk of bankruptcy of the enterprise (see →). This comparison criterion is defined in the law of the Civil Code of the Russian Federation ( clause 4 art. 99 Civil Code of the Russian Federation; clause 4 art. 35 of the Law on Joint Stock Companies). Failure to comply with this ratio will lead to the liquidation of this enterprise through judicial proceedings. The figure below shows the ratio of net assets and authorized capital. The net assets of OJSC Gazprom exceed the authorized capital, which eliminates the risk of bankruptcy of the enterprise in court.
Net assets and net profit
Net assets are also analyzed with other economic and financial indicators of the organization. So the dynamics of growth of net assets is compared with the dynamics of changes in sales revenue and. Sales revenue is an indicator reflecting the efficiency of an enterprise's sales and production systems. Net profit is the most important indicator of the profitability of a business; it is through it that the assets of the enterprise are primarily financed. As can be seen from the figure below, net profit decreased in 2014, which in turn affected the value of net assets and financial condition.
Analysis of net asset growth rate and international credit rating
In the scientific work of Zhdanov I.Yu. shows that there is a close connection between the rate of change in the net assets of an enterprise and the value of the international credit rating of such agencies as Moody’s, S&P and Fitch. A decrease in the economic growth rate of net assets leads to a decrease in the credit rating. This in turn leads to a decrease in the investment attractiveness of enterprises for strategic investors.
Summary
Net asset value is an important indicator of the amount of real property of an enterprise. Analysis of the dynamics of changes in this indicator allows us to assess the financial condition and solvency. The value of net assets is used in regulated documents and legislation to diagnose the risk of bankruptcy of companies. A decrease in the growth rate of an enterprise's net assets leads to a decrease not only in financial stability, but also in the level of investment attractiveness. Subscribe to the newsletter on express methods of financial analysis of an enterprise.
Definition
Net assets- this is a value determined by subtracting the amount of its liabilities from the amount of the organization’s assets. Net assets are the amount that will remain to the founders (shareholders) of an organization after the sale of all its assets and the repayment of all debts.
The net asset indicator is one of the few financial indicators, the calculation of which is clearly defined by the legislation of the Russian Federation. The procedure for calculating net assets was approved by Order of the Ministry of Finance of Russia dated August 28, 2014 N 84n “On approval of the Procedure for determining the value of net assets.” This procedure is used by joint-stock companies, limited liability companies, state unitary enterprises, municipal unitary enterprises, production cooperatives, housing savings cooperatives, and economic partnerships.
Calculation (formula)
The calculation comes down to determining the difference between assets and liabilities (liabilities), which are determined as follows.
The assets accepted for calculation include all assets of the organization, with the exception of receivables of the founders (participants, shareholders, owners, members) for contributions (contributions) to the authorized capital (authorized fund, mutual fund, share capital), for payment of shares.
The liabilities accepted for settlement include all liabilities except deferred income. But not all future income, but those that recognized as an organization in connection with receiving state assistance, as well as in connection with the gratuitous receipt of property. These incomes are actually the organization's own capital, therefore, for the purposes of calculating the value of net assets, they are excluded from the short-term liabilities section of the balance sheet (line 1530).
Those. The formula for calculating net assets on the Balance Sheet of an enterprise is as follows:
Net assets = (line 1600 - debt) - (line 1400 + line 1500 - DBP)
where ZU is the debt of the founders for contributions to the authorized capital (it is not separately allocated in the Balance Sheet and is reflected as part of short-term receivables);
DBP – deferred income recognized by the organization in connection with the receipt of government assistance, as well as in connection with the gratuitous receipt of property.
An alternative way to calculate the net asset value, giving exactly the same result as the formula above would be:
Net assets = line 1300 - ZU + DBP
Normal value
The net asset indicator, known in Western practice as net assets or net worth, is a key indicator of the activity of any commercial organization. The organization's net assets must be at least positive. Negative net assets are a sign of the insolvency of an organization, indicating that the company is completely dependent on creditors and does not have its own funds.
Net assets must not only be positive, but also exceed the authorized capital of the organization. This means that in the course of its activities, the organization not only did not waste the funds initially contributed by the owner, but also ensured their growth. Net assets less than the authorized capital are permissible only in the first year of operation of newly created enterprises. In subsequent years, if net assets become less than the authorized capital, the civil code and legislation on joint stock companies require that the authorized capital be reduced to the amount of net assets. If the organization's authorized capital is already at a minimum level, the question of its further existence is raised.
Net asset method
In valuation activities, the net asset method is used as one of the methods for assessing the value of a business. With this method, the appraiser uses data on the organization's net assets according to the financial statements, previously adjusted based on its own estimated values of the market value of property and liabilities.
The company's net assets are those of the company's own funds that will remain with it after it has paid off all creditors. That is, it is the difference between a company's assets and its liabilities, subject to minor adjustments. Another way to determine the net asset indicator is to take the total indicator of Section III of the balance sheet “Capital and Reserves” and also adjust it by certain amounts. That is, net assets are the capital of the LLC.
Calculation of net assets on the balance sheet
The value of net assets is determined according to the balance sheet data using the formula (clause 2 of Article 30 of the Law dated 02/08/98 N 14-FZ; Procedure approved by Order of the Ministry of Finance dated 08/28/2014 No. 84n):
From this formula it is clearly seen that equity and net assets are essentially the same thing.
Or you can use the following formula for calculating net assets on the balance sheet:
Net assets in 2018 are calculated using the same formulas.
Net assets: accounting line
The amount of net assets is reflected in the financial statements in section 3 “Net assets” of the Statement of Changes in Capital.
If net assets are less than authorized capital
If your company's net assets have become less than its authorized capital, then you are obliged to reduce the authorized capital to the level of net assets and register such a decrease in the Unified State Register of Legal Entities (). That is, at least after drawing up the annual financial statements, you need to compare the authorized capital and net assets.
In addition, the following rule applies. If an LLC decides to pay dividends to participants, but as a result of accrual of dividends, the value of net assets becomes less than required, then dividends cannot be accrued in the planned amount. It is necessary to reduce the profit distributed on dividends to an amount at which the above ratio will be satisfied.
At the same time, no liability has been established for violation of the requirement for the ratio of authorized capital and net assets.
Negative net assets
If the net assets become less than the minimum authorized capital (10,000 rubles) or the net assets generally go into the negative, then the LLC is subject to liquidation (Clause 3, Article 20 of the Law of 02/08/98 N 14-FZ).
Net Asset Valuation
The tax service also analyzes the financial statements of companies and selects those with net assets less than the authorized capital. After all, negative or simply small net assets are the result of a large loss in the current or past periods. After this, the head of the company is invited to a commission at the Federal Tax Service, where he is asked to increase net assets to the required level.
Increase in net assets
There are several ways to increase net assets:
- carry out a revaluation of property (fixed assets and intangible assets) in accounting (clause 15 of PBU 6/01);
- check accounts payable (perhaps some debts have expired);
- receive help from company participants (contribution to LLC property).
