When an enterprise or company is created, many hope for a long, fruitful and efficient existence. But, alas, this is not always the case. And it is necessary to acquire external debts, and it happens that investments are needed. Thus, there is capital that does not belong to the owner of the enterprise. And with it there are financial risks. What it is? What means financial ratio risk? Why is it considered, how is it interpreted?
What is called the financial risk ratio?
To determine the level of potential problems, consider this indicator. The financial risk coefficient (leverage or attraction) indicates the ratio of borrowed from external sources of finance to equity. It is a comparative tool that shows the potential level of freedom in decision making, income distribution, as well as the possibility of attracting additional money for the needs of the enterprise.
Where is it used?
An important role is played by the financial risk ratio in the bond, loan and credit markets. Moreover, it has mutual use: it can be used by both an entrepreneur and a potential investor. For the owner of the company, the financial risk ratio shows the state of the enterprise (and the trends for its change are the features of development). Also informing him is very important in terms of planning for the future.
For an investor, the financial risk ratio is an indicator of the stability of the enterprise. So, if we consider the company, in which it is 0, we can say that up to this point everything was fine with her. But due to some reason or reasons, things were shaken, so a little financial assistance will not hurt the company. But if the financial risk ratio reached a value of 1 or even exceeded it, then there are two options:
- Ignore this company as such, which constantly needs a fin. help. Probably the situation will not change in the near future.
- Take advantage of the situation by supporting the company. After all, if it nevertheless goes bankrupt, the investor will be able to claim production secrets, territory, buildings, equipment as a payment of debts. If the enterprise is of significant interest, then such a scheme looks very real.
But how, in fact, to learn the financial risk ratio? And for this it needs to be calculated.
How to calculate the financial risk ratio?
It might seem awful to count something. Many economic formulas are a real headache. But not in this case. The financial risk ratio for the balance sheet is one of the simplest. First, take a look at the formula, and then move on to explain it.
TOfr = ZK / SK
Here:
- TOfr Is a financial risk ratio.
- ZK is a borrowed capital. All that has been borrowed from a banking institution or invested by a separate legal or natural person.
- SC is equity. This includes all funds that belong to the owner / founder of the company for which the financial risk ratio is considered.
Interpretation of the obtained values and practical application
So you considered the data, got some values - what to do next? What allows us to talk about the financial risk ratio? The formula is used, and now the figures obtained must be interpreted. This is required in order to assess the financial stability of the company in case of shocks.The coefficient depicts how many units of borrowed funds fall on 1 money of your investments. The larger the indicator, the greater the dependence on investors and external debts of the enterprise. The coefficient should be as small as possible. The optimal indicator is less than 0.5. With a value of 1, the company has significant financial risks, and a number of measures need to be taken to correct the current situation.
Conclusion
Keep in mind that this ratio does not mean that the company is about to go bankrupt, even though it can reach values of 2, 3 or 5. It simply indicates that in case of any problems of capital flight or Something similar, the operation of the enterprise can be stalled in a significant way. For example, you can consider this option: the total capital of the company is 1000 rubles. 200 of them belong to the investor.
If he suddenly withdraws his money, then the remaining 800 will help to survive. But if you change the values? It is unlikely that 200 rubles is enough for quality work. And it helps to understand the line when you can take money, and when not, the financial risk ratio. The balance sheet formula, although it indicates an acceptable margin, should be treated with caution - borrowed money from others, and for a short time, and return your money, in large numbers and forever. Optimal actions are reducing the coefficient to zero.
