Unlike price fluctuations, financial stability is not so easy to determine, much less measure. This is due to the fact that all its components depend on each other and are in constant interaction with the entire national economic system. Further complicates the whole time factor and globalization. Therefore, the indicator of financial stability, even for an individual company, should be calculated by specialists who can figure out all the intricacies in the economy as a whole and in the industry in question in particular. Over the past twenty years, analysts have developed a whole range of coefficients and indicators that can be used to predict the future of individual enterprises and states based on their current state of affairs. Such a calculation is carried out in the process of financial analysis.
Stability paradigm shift
In recent years, the approach to what an ideal indicator of financial stability should be has changed significantly. The macroeconomic component came first. This is due both to the development of statistical methods and to scientific and technological progress, which made it possible to easily process huge amounts of data. The attention of specialists focused not on individual firms, but on entire industries and national economies.
Moreover, the financial analysis left the calculation of indicators that warn in advance of the danger of collapse. Computer capacities made it possible to constantly monitor the banking system, tracking the default risks of individual enterprises and entire states. The range of indicators used has expanded significantly. In recent years, the attention of analysts and researchers has increasingly focused on the dynamics of behavior and the spread of shocks from one industry to another. This direction is called shock transmission. An indicator of the type of financial stability comes to the fore. The main problem of such studies remains gaps in statistical information. But constant discussions and work on the analytical base help the development of this area.
Figures are the key to successful entrepreneurship
Financial analysis is an assessment of the viability, stability, and profitability of a business or an individual process. Specialists develop various coefficients that summarize statistics. Among them, a separate place is taken by indicators characterizing financial stability. Summarized reports of specialists are usually used by top management in order to make business decisions. In particular, they include:
- Continue or stop the production process or its individual operations.
- Buy or make certain materials on your own;
- To purchase or rent special equipment and machinery for the production of goods.
- Issue new securities or take a loan from a bank in order to increase working capital.
- Make decisions regarding investments or capital loans.
All this helps to understand the indicators of financial stability of the enterprise. Based on them, management makes decisions about the choice between various alternatives during the course of business.
Financial analysis objectives
Assessment of the success of the enterprise by specialists is carried out in four main areas:
- Profitability. The main source is a statement of income, which describes the results of the company. The indicator is the rate of profit.Success in this direction means the ability of the enterprise to receive income from its activities and maintain growth in the short and long term.
- Solvency. Source - the balance sheet, which reflects the financial condition in a certain period of time. Success in this direction indicates the company's ability to pay its obligations to creditors and third parties in the long run.
- Liquidity. The source is the balance sheet. The set of indicators in this direction means the ability of the enterprise to maintain cash flow, satisfying its short-term obligations.
- And finally, stability. The main source is both a statement of income and the balance sheet. In order to calculate the absolute indicators of financial stability, specialists also use a number of other documents. The stability of the company is its ability to stay in business for a long period of time without significant losses. This indicator summarizes the previous three and is largely based on them.
Methods for assessing enterprise sustainability
In the most simplified form, financial analysis is a comparison of various ratios and indicators. They are compared both with them in the past, and with similar, but average in the industry. The analysis uses percentages of growth, solvency ratios profit margins, indicators of financial stability of the enterprise and other similar indicators. There are three types of analysis:
- Comparison with performance in the past. Analysts identify periods (most often five years) in the activities of the enterprise and compare them with the current state of the business and with each other.
- Comparison with future performance. Analysts, using indicators in the past and a number of methods of economic and mathematical modeling, are trying to predict the direction of further business development. Extrapolation is the main source of errors in financial analysis, since the past does not accurately determine the inevitability of future failures or successes.
- Comparison with other business entities. Analysts in this case can take both the average relative or absolute indicators of financial stability in the industry, and use the available statistical information for similar firms.
Key indicators of financial stability
Researchers use a range of quantitative indicators of stability. The IMF has developed its own indicators of financial stability. The table below allows you to summarize the achievements of scientists in this area. All indicators in it are divided into six sectors. Features, frequency and nature of their application will be discussed below.
| Sector | Financial stability indicator |
| Real economy | GDP growth |
| Government fiscal position | |
| Inflation | |
| Corporate sector | Total debt |
| The difference between credit and debit | |
| The arrival and use of currency | |
| Corporate Defaults | |
| Household | Assets |
| Debt | |
| Income (from employment or savings) | |
| Consumption | |
| Debt service and important payments | |
| Financial system | Monetary Aggregates |
| Real interest rates | |
| Growth in the ratio of loans and deposits | |
| Capital adequacy | |
| Liquidity indicators | |
| Autonomous Bank Credit Ratings | |
| Sectoral and regional diversification of banking assets | |
| Foreign economic sector | Real Exchange Rates |
| Foreign currency reserves | |
| Current accounts and capital flows | |
| Maturity of foreign exchange mechanisms | |
| Financial markets | Changes in equity indices |
| Corporate bond spreads | |
| Market liquidity | |
| Volatility | |
| Domestic prices |
Real sector
An aggregate indicator of financial stability is based on all six sectors.The real economy sector is described with the help of GDP growth, fiscal position of the state and inflation. All these indicators are measured every month, quarter or year. GDP growth reflects the ability of the economy to ensure the well-being of the population, as well as the risk of overheating. Fiscal position - the ability to find financing for projects that do not overlap revenues. The less its value, the greater the vulnerability of the state due to the inaccessibility of free monetary resources. Inflation reflects the structural problems of the economy and social dissatisfaction, which can lead to political instability.
Corporate part of the national economy
Indicators of financial stability of an organization or an individual enterprise are taken into account in this sector. Evaluation is most often done quarterly or annually. High corporate debt indicates a high level of obligations that can cause instability of the entire system. The difference between accounts payable and receivable indicates liquidity. Its low rate may lead to the inability of the enterprise to pay for its short and medium term obligations. Defaults in the corporate sector indicate the insolvency of many enterprises, which in the future will lead to problems in other sectors and the banking system.
Household
The success of this sector is measured using net assets and retained earnings. Large numbers here indicate that households will be able to overcome temporary difficulties and crises. This sector is mainly represented by small businesses, so statistics should be collected as often as possible. Key figures are usually presented every month, quarter and year.
Financial system
This sector is characterized by a number of indicators, listed in the table above. They are used to find problems in the banking system. When a crisis occurs, indicators of assessing financial stability are used to find the answer to the question of how much it cost the state and its population. Excessive growth in the number and size of credit and deposit operations may indicate an increase in inflationary pressures. Real interest rates that exceed the threshold for a given country can lead to an increase in the share of debt in GDP. Low banking liquidity indicates approaching structural crisis.
Markets
Financial markets are characterized by capital indices, liquidity and volatility. The most important in their analysis is to determine the level of investor interest in the national economy. Its decrease can lead to significant financial problems. A decrease in liquidity does not always indicate problems, but may mean rapid economic growth, due to which additional investment opportunities appear within it.
Indicators of foreign economic activity
Export-import relations of the country are characterized by real exchange rates, reserves, current accounts, capital flows and maturity of foreign exchange mechanisms. These indicators may reflect unexpected changes in the competitiveness and stability of foreign financing of domestic debt.
Calculation of financial stability indicators
The national economy is a huge number of key sectors that are in the process of complex interaction. The situation is further complicated by non-linearities, which lead to the spread of shocks and their transfer from one industry to another. There are links between monetary and financial stability, as monetary conditions affect asset prices and vice versa. Therefore, it is impossible to focus on individual indicators, albeit competently selected.A financial analysis of the activities of both an individual enterprise and the whole economy should be based on a number of areas, based on the state of which a composite indicator of sustainability can be derived.
