Why is the financial asset security ratio used? What regulations exist here? How important is their implementation and compliance?
general information
To begin with, you should know that the ratio of financial liabilities to assets shows how generally covers the organization’s property all its loans and borrowings after its implementation. How to determine the value of this parameter? How to calculate the ratio of financial liabilities to assets? The formula is quite simple and represents the ratio of short-term and long-term loans of the organization to the value of its property. It is calculated, as a rule, at the end of the reporting period.
What is he talking about
This ratio is used to determine what risks are lenders in case of a loan. It is believed that the organization becomes insolvent when the value of this indicator does not exceed 0.85. Although, if the structure of liabilities was unsatisfactory for the last four quarters, this can also be considered as a reason for assigning such a status to a company. What to do if a poor asset liability ratio? The norm in this case must be raised. To do this, first of all, you need to conduct a detailed analysis of the organization’s reporting to identify the causes of the current financial condition. In this case, it is necessary to check the balance sheet at the beginning and end of the period under review. If in absolute terms the amounts fall, then we have before us a clear reduction in economic turnover. And there are a lot of reasons for this: it is a reduction in demand, and limitation of access to raw materials, materials and semi-finished products, and the division of one structure into several or the allocation of subsidiaries.
Legal requirements
As a rule, the indicator in question is popular either among enterprises that are in a difficult situation, or who care about their functioning. Although its calculation can be introduced as mandatory by law, as in the Republic of Belarus. So what is the ratio of assets to financial liabilities here? The Republic of Belarus as a whole is not far from world practice, unless a whole series of provisions are stipulated in legislative documents. So, it is considered that it can act as sources of stabilization of the situation (reserve, authorized, additional fund, retained earnings, earmarked funding, etc.). Moreover, an increase in one of these sources contributes to the overall increase in the stability of the enterprise. How can we improve the ratio of financial liabilities to assets of the standard? Belarus in its legislation also gives an answer to this question - to study the structure of the liability of the balance sheet to establish a number of reasons that led to insolvency. For this, it is necessary to compare the studied data by sections and articles.
What to do
If after the analysis it is recognized that the balance sheet is unsatisfactory and the organization is insolvent, then they compare what it owes to it. If there are certain arrears on the part of the state, much can be done to help keep the company afloat.In cases where a bad state of affairs arises due to incompetence or other objective problems, then this is already a problem of the commercial structure itself. And in this case, it is often declared bankrupt with subsequent procedural moments. But it was more a general theory. Let’s talk more specifically.
Using
So, we already know that the ratio is an indicator of the security of the debtor's obligations with the help of its assets. And thanks to this, it can be determined whether the enterprise will be able to fulfill its obligation with the help of its property converted into cash or not. Consider a small example. Let's say we have a construction company. For enterprises operating in this industry, the normative value is 1.2. If over the year the value from this indicator increased to 2.4, then we can conclude that the company has created a reserve stock, which made it possible to cover all losses and expenses that arose in the reporting period. Such a change may be caused by the acquisition of current assets or something else.
We change our formula
Remember, at the beginning of the article the basic equation for the calculations was described? Let's expand it a bit. And now our formula looks like this: Ko = (Ko + Do + Pp) / Ca. It uses the following indicators:
- K / To - short-term / long-term obligations.
- RR - Reserve expenses.
- Ca - The value of assets.
It should be noted a number of factors that are of great importance, although they are reflected in the formula very distantly. First of all, remember the balance of liabilities and assets of companies. If the ratio of financial liabilities to assets is 1.5-2 times higher than the standard, then this is considered a pretty good indicator. But if there is a five-fold excess, then this is an occasion to think. After all, if the money does not work, but is deposited on the accounts, then it is likely that the leadership does not show confidence in its actions, and this can have negative consequences in the medium term.
About the negative
Asset liabilities ratio is an extremely important indicator. If the company is kept at 0.85 or lower, then its financial stability is unsatisfactory. With the continuation of this state of affairs for more than four quarters, the issue of its solvency should be raised. When assessing the situation, the coefficient value must be taken into account. Of course, if it is less than 0.85, this does not mean that everything is over. But, at a minimum, a competent manager is needed who can save the situation. And for this, he will need to adequately assess the current situation. And if after the changes positive dynamics of growth begin, it can be confidently stated that the company is actively developing, and if necessary, it will be able to satisfy the demands of its creditors.
Work in various fields
The most logical, at first glance, would be the creation of a single coefficient equal to unity, and to fit this indicator companies and requirements for them. But not everything is so easy. A single standard does not take into account existing diversity.
Consider two examples: a large store and a construction company. So, in the first case there are significant areas (say, 20 thousand square meters). And now you need to fill them out. But where to get the goods? More precisely, what to buy it for? Most large stores for this purpose attract loans for which products are bought, credit and interest are paid, and part of the profit is taken away and invested in expanding the network. In this case, the value of the coefficient in the range of 0.95-1.05 is quite normal.
With construction companies, things are not so easy. First of all, it is necessary to note the complexity of the work carried out.In addition, if there is a wrong project, then all the buildings will have to be demolished, and in fact, the real, seemingly, support turns into a pile of stones. Therefore, they are required to have a significant amount of assets (ready-made buildings, equipment, etc.) in order to compensate for the loss. And numerous construction scams also played a role here. I would also like to note the fact that some commercial structures are very much knocked out of the general line.
Let's look at institutions like banks. For them, the security ratio is different in different countries, but in general, two requirements are put forward - to have a certain percentage of assets and the amount in the account at the Central Bank. In short, these are the requirements to have conditionally 10% of all borrowed funds, but not less than 150 million rubles.
Conclusion
The safety and stability of the enterprise is important for the steady development of the economy. Of course, it is impossible to make sure that some structures do not go broke, because we live in a market economy. But honest and understandable rules of interaction, competent management - and enterprises will function for quite some time. After all, alas, nothing lasts forever. And even the largest structures with a significant history of activity periodically recede into oblivion. But competent management and an adequate risk assessment will be able to move this danger to an indefinitely long period of time.