Financial ratio dependence is one of the signs of financial stability of the company. Financial sustainability shows the company's ability to work and improve, while maintaining a balance between assets and liabilities. A company can be called financially stable if its cash flows are optimal and balanced, there are financial resources both for conducting current activities and for covering loans received. This company will be called investment attractive and have an acceptable degree of risk for owners.
Definition
The financial dependency ratio describes the level of company dependence on third-party loans. This indicator is the inverse of the indicator of concentration of own funds. The increase in the ratio demonstrates an increase in the level of external loans in company financing. A reduction to one indicates that the company is fully funded by its owners. The analysis of the coefficient is understandable and simple: if it goes 1.25, this means that at 1.25 rubles invested in the assets of the company, 0.25 rubles. are borrowed.
The considered indicator is also called coefficient of autonomy. It is often used in practice, as it is convenient for use in deterministic factor analysis.
The financial dependency ratio shows the level of the company's ability to cover all of its debts in the sale of assets.
What affects financial stability
The financial dependence ratio is one of the indicators of the financial well-being of the company.
Financial stability demonstrates the company's ability to work and improve, while maintaining a balance between assets and liabilities. A company can be called financially stable if its cash flows are optimal and balanced, there are financial resources both for conducting current activities and for covering loans received. This company will be called investment attractive and have an acceptable degree of risk for owners. The financial position of the company depends on such factors:
- amount of equity;
- asset quality level;
- revenue size and stability of its receipt;
- profitability indicator, taking into account financial and operational risk;
- liquidity ratio;
- the ability to quickly attract external loans.
Along with this, the last two ratios are dependent on financial stability.
With the increase in the level of third-party loans with financing of the enterprise, the solvency of the company decreases. This means a low level of financial independence of the company. The financial dependency ratio shows and affects the quality of relations with banking institutions and partners.
Along with this, the impressive amount of equity held in the assets of the company also does not demonstrate the success of its development. Profitability increases when using not only own, but also borrowed resources. Therefore, it is important to choose the best ratio of the share of loans to the company's own resources.
How to calculate the coefficient of financial dependence
The formula for the calculation is as follows:
Total assets (liabilities) / equity
Or so:
KZ = ЗК / СК
where SK is equity;
ZK - borrowed capital.
Also, the indicator can be calculated using the balance lines:
How to calculate the coefficient of financial dependence on the balance sheet = (Line 1400 Form 1 + Line 1510 Form 1 + Line 1520 Form 1 + Line 1550 Form 1) / Line 1300 Form 1.
Methods for calculating the indicator
To calculate the indicator, three main methods are used:
- A study of the liquidity of company property (assets).
- The study of the mobility of financial statements (the distribution of reporting items by their feasibility and the study of the relationship of asset and liability).
The study of the company, its ability to pay on loans. Here, a comparative (analytical) balance is also formed, an assessment of business activity ratios is carried out, etc.
These methods will allow you to optimally and comprehensively study the coefficient of financial dependence.
The standard value of the indicator should be within 0.7. If it exceeds, then the company increases its dependence on third-party borrowed resources.
Interpretation of financial dependency ratio
The considered coefficient of financial dependence demonstrates the company's dependence on third-party sources of financing.
A strong dependence on external sources threatens to negatively affect the position of the company with a decrease in sales, since the cost of paying interest on loans is a constant cost that the company cannot reduce in proportion to the decrease in sales.
In addition, a high rate of dependence will soon lead to the fact that the company will have difficulty attracting new loans at an average percentage in the market, especially in bad times.
Foreign practice
As for the level of attracting foreign loans, there are different opinions in the practice of foreign companies. The most popular is that the level of equity in the total amount of sources of long-term loans should be quite substantial, while the lower level is within 60% (0.6). If the bar is lower, the return on personal capital will no longer meet the optimal values.
Increasing indicator value
It is important to understand that all actions aimed at reducing the indicator “Ratio of financial dependence of equity” are studied in the economic analysis as positive. In other words, any enterprise will strive to increase the share of its own resources in order to increase the stability of operations. It should be noted that increasing the amount of financial resources due to the attraction of low-cost loans is considered as a positive and competent solution. To obtain them, we need a financial dependency ratio, the formula of which makes it easy to carry out competent calculations and draw conclusions.
As a result, the indicator in question demonstrates a financial value that describes the company's dependence on borrowed resources. The financial dependence ratio, the normative value of which should be within the framework of 0.5-0.7 pp, is calculated as the ratio of the volumes of own and borrowed capital.
