The restore the solvency ratio formula and calculation example

Solvency is considered to be one of the key performance indicators of the company. It reflects the ability of the company to cover all its obligations.

Evaluation

As a source of information for the analysis of solvency acts as a balance sheet. One of its main goals is the assessment of the company's assets, its liabilities and equity. To determine these parameters it is necessary to analyze the structure of the property and debts of the company, to set the level of balance sheet liquidity. In addition, you should carry out the calculation and evaluation of ratios of solvency and economic stability. Normal financial condition of the company is characterized by good levels of capability to repay obligations. Disappointing said low coefficient of recovery of ability to pay. The best is the option when the company has available for seeking funds for the payment of debts. But the enterprise can remain solvent, even if it is possible to realize assets to repay obligations. While firms may not have the funds.

The value of the coefficient of solvency recovery

In accordance with the Federal law "On bankruptcy", under the failure of the enterprise should understand claimed debtor or recognized by the court's inability to fully satisfy the demands of creditors or to pay the required fees. Prior to the date of adoption of the act had a different procedure of recognition of the company bankrupt. The company was considered insolvent, it was necessary to calculate:

1. Restore the solvency Ratio.
2. Total liquidity.
3. Ratio of their working capital.

Liquidity is a characteristic of the company's assets that determines the possibility of their realization in a short time at market price. Factor to restore the solvency of the company acts as a financial, economic indicator, reflecting the company's ability to reach the optimal level of liquidity for six months at the time of the reporting date.

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Asset Classification

The Division is based on liquidity indicator. Assets can be high, small and illiquid. In ascending order are:

1. Unfinished construction sites, buildings, structures, equipment, machines.
2. The Volume of commodity stocks and goods in warehouses.
3. Its shares or securities belonging to the state.
4. Balances.

Restore the solvency Ratio formula

Description this indicator is present in the Methodological position, which is determined by the assessment of the financial position of the company and the poor state of its balance sheet. The paper also present the equation, which can be used to find restore the solvency ratio. The formula looks like this: KV = (К1Ф + 6/T (К1Ф — К1Н)) / 2.

The equation is used as a measure of liquidity of the firm and the standard is:

• The actual number of degrees of liquidity (at the end) - К1Ф;
• Initial rate - К1Н;
• Increased at the rate of - К1норм = 2;
• The time to restore solvency (in months). - 6;
• Reporting period (calculated in months). - T.

A More accurate result can be obtained for 4 or more period. According to economists, restore the solvency ratio is not the exclusive indicator, which should be followed.

Recognition of structure of balance unsatisfactory

In the analysis process to the company was considered insolvent and must be performed any of the following conditions:

• Liquidity ratio by the end of the reporting period is less than 2.
• The availability of their funds at the reporting date is less than 0.1.

Consider what could be the factor to restore the solvency.

Example

In the past year, the liquidity ratio of the company at the beginning of the period amounted to 0.97, and by the end of 1.18. Using the above formula, you obtain: KV = 1,18 + 6/12 (1,18 – 0,97) = 0,3528.

If the computation is obtained is greater than 1, we can say that the company has the opportunity to achieve the optimum financial condition for the coming six months. If the restore the solvency ratio is less than one, respectively, in the next six months, the company will not be able to achieve the necessary economic stability.

Prediction

The Coefficient of restitution/loss of solvency is one of the key managerial analysis of the company. These indicators allow us to plan financial and economic activity for a certain period. The restore the solvency ratio gives the opportunitydistribute procedures and tools for the next six months to exit the firm from the crisis. However, such a situation can be avoided. To do this, calculate the rate of deterioration of the current ratio of the company for three months following the reporting date: BGC = [К1ф + 3/T (К1ф - К1н)] / К1норм.

The reference will be compared with the coefficient of restitution/loss of pay, taken unit. If the evaluation of the probability of deterioration in the financial situation it is greater than 1, it indicates that the company has all the chances not to lose its liquidity. Accordingly, if the value is less than 1, the firm in the next three months may become insolvent.

Identification about bankruptcy

To date, there is a somewhat different rating system. The analysis is not itself a failure, but revealed signs of fictitious bankruptcy. They represent the company's actual ability to repay obligations to creditors fully on the date of filing of application about recognition its bankrupt. The identification of these characteristics is carried out when establishing ability to pay the debt assets by the ratio of their size with the size of short-term liabilities. The calculations exclude consumption funds, future revenues and reserves fees and expenses. After making the necessary calculations, you can draw the appropriate conclusions

• If the degree of security equal to or greater than 1, then there are signs of fraudulent bankruptcy.
• If the value is less than one, respectively, the real failure.

Check financially-economic work of the company

This procedure involves 2 stages:

• Calculation of indicators influencing the change of the capabilities of the company to repay its obligations, which took place during the validation period.
• You analyze the terms and conditions of minimisation variables.

The Indicators that reflect the level of debt to creditors, the following:

• Security liabilities by its current assets.
• Net assets.
• A debt Security of all assets.

The Study of financial-economic activity of the firm involves the study of the dynamics of these indicators in the validation period. In case of detection at the first stage of the procedure, a significant deterioration in the degree of security of debt, experts are moving to the analysis of the conditions under which deals were concluded within the specified time. Into consideration those agreements that could affect performance.