The solvency ratios of the company act as indicators of its financial stability. They reflect the ability of the company to repay obligations. A decline in a number of indicators may indicate impending bankruptcy. Let us further consider what are the solvency ratios of the enterprise. 
Formation Features
Solvency of the enterprise is formed due to:
- The presence of assets. They can be presented in different forms.
- The degree of liquidity of assets. It is determined by the level of feasibility of funds.
The assets of the enterprise are divided into current and permanent. The first ones are those that can be turned into money during the production period (12 months). Fixed assets include fixed assets that are not involved in the direct release of goods. All assets are ranked by liquidity level. The analysis determines the speed of their sale and transformation into money. The more highly liquid assets the company has, the higher its solvency.
Classification of funds
Depending on the speed of implementation, they share:
- Highly liquid assets (A1). They form the current funds of the company. Such assets are characterized by the highest speed of implementation and transformation into finance. This category includes short-term deposits in securities and in banking organizations, cash at the register.
- A2 - quick-selling assets. They also relate to current assets. This category includes receivables (up to a year) and bank deposits.
- A3 - Slow-moving assets. They, like the previous ones, make up current assets. These include receivables with a period of more than a year, stocks of finished products, materials, raw materials, work in progress, semi-finished products, VAT.
- A4 - difficult to sell assets. They form permanent funds. This category includes: structures, equipment, buildings, land, transport, as well as intangible assets in the form of trademarks and patents.
Differences from Creditworthiness
Solvency is closely related to this category. However, there is a significant difference between them. As mentioned above, solvency reflects the ability of an enterprise to repay obligations using any assets. Creditworthiness assesses the state to pay debts using short- and medium-term funds. The analysis in this case does not take into account fixed assets (structures, land, buildings, transport, etc.). If a company uses fixed and slow-moving funds to pay off obligations, this can lead to a drop in production capacity. In the long run, this, in turn, will cause a decrease in financial stability.
Key indicators
The solvency of the company is estimated by the following ratios:
- Current, absolute, quick and general liquidity.
- Recovery and loss of solvency.
Current liquidity has a value of CTL> 2. The optimal level is influenced by the industry sector of the company and the characteristics of its core business. This solvency ratio, therefore, must always be compared not only with the identified general normative indicators, but also with industry average values. The calculation is carried out as follows: Ctl = (A1 + A2 + A3) / (P1 + P2).
Fast (urgent) liquidity
This solvency ratio reflects the company's ability to repay short-term liabilities through quick and highly liquid assets. The standard value for it is Cbl> 0.7-0.8. The calculation is carried out according to the formula: Cbl = (A1 + A2) / (P1 + P2).
Absolute liquidity ratio
This solvency ratio illustrates the company's ability to repay its short-term debt using highly liquid assets. The optimum value of Kabl> 0.2. How is this solvency ratio calculated? The formula for it is as follows: Kabl = A1 / (P1 + P2)
General indicator
How to calculate this solvency ratio? The formula for this indicator is: Col = ((A1 + 1/2) x (A2 + 1/3) x A3) / ((P1 + 1/2) x (P2 + 1/3) x P3)).
General solvency ratio balance sheet reflects the company's ability to fully repay liabilities with all types of available assets. This indicator includes not only short, but also long-term debt. The optimal level is counted> 1.
Solvency recovery ratio
This indicator illustrates the possibility of returning current liquidity to its normal value within six months from the reporting date. The value is determined by the ratio of the calculated level to the set: Kvp = [K1f + 6 / T (K1f - K1n)] / K1norm
- The actual value (at the end of the period) of current liquidity is K1f.
- The level at the beginning of the reporting period - K1n.
- The standard value is K1norm (equal to 2).
- The period of liquidity return to the optimal value (in months) is 6.
- Reporting period (in months) - T.
If the solvency recovery ratio is more than one when calculated for six months, then this indicates that the company has the opportunity to return liquidity to the optimal level. If the value is less than 1, the situation for the company is unfavorable for the next three months from the reporting day.
Solvency loss ratio
It reflects the probability of a decrease in the level of current liquidity to the established standard. The calculation is as follows: Coop = [K1f + 3 / T (K1f - K1n)] / K1norm.
If the solvency loss ratio is greater than one when calculated for a period of three months, then the company may not lose assets liquidity in the near future. If the value is less than 1 for the same period, then the probability of loss is high.
Conclusion
The Law governing the procedure and procedure for recognizing insolvency (bankruptcy) identifies three main indicators that are used in assessing the solvency of a company:
- Current liquidity level.
- Recovery and solvency ratios.
Currently, these values are used in practice as information indicators. Nevertheless, when conducting a financial analysis in a company, all of the above elements matter. Only with their comprehensive study can we get a clear picture of the capabilities of the company and the liquidity of its assets. In this case, the calculation and analysis can be done for specific dates. Depending on the outcome, certain management decisions are made. In such cases, they will have a mathematical justification. In addition, calculations are important for interested parties, including lenders.
