Coefficient of restoration of solvency: the formula and an example of calculation

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

Evaluation

The balance sheet serves as a source of information for analyzing the solvency . One of its main objectives is to assess the company's assets, its liabilities and the size of its own capital. To determine these indicators it is necessary to analyze the structure of the property and debts of the firm, establish the liquidity level of the balance. In addition, it is necessary to calculate and assess solvency ratios and economic sustainability. The normal financial condition of the company is characterized by a good level of ability to repay obligations. A low solvency recovery ratio indicates a poor situation. Optimum option is considered, when the firm has free funds for payment of debts. But the enterprise can remain solvent even if it is possible to sell assets to pay off liabilities. In this case, the company may not have funds.

The value of the solvency recovery ratio

In accordance with the Federal Law "On Bankruptcy," the insolvency of an enterprise should be understood as the inability of the debtor or a court recognized inability to fully satisfy the claims made by creditors, or to pay mandatory payments. Before the date of adoption of this law, another procedure for declaring a firm bankrupt was in force. That the company began to be considered insolvent, it was necessary to make calculation:

1. Coefficient of restoration of solvency.
2. The indicator of total liquidity.
3. Coefficient of availability of its working capital.

Liquidity is a characteristic of the company's assets, which determines the possibility of their implementation in a short time at a market price. The recovery factor of the company's solvency acts as a financial, economic indicator reflecting the company's ability to enter the level of optimal liquidity for half a year at the reporting date.

Classification of assets

The division is based on the liquidity indicator. Assets can be high, small and illiquid. Ascending distinguish:

1. Unfinished building objects, buildings, structures, equipment, machinery.
2. The volume of raw materials and products in warehouses.
3. Own shares or securities owned by the state.
4. Funds in bank accounts.

Coefficient of restoration of solvency: the formula

The description of this indicator is present in the Methodological position, which determines the assessment of the material situation of the company and the unsatisfactory state of its balance. In the document there is also an equation on which you can find the coefficient of solvency restoration. The formula looks like this: KB = (K1F + 6 / T (K1F - K1H)) / 2.

The equation uses the liquidity indicator of the firm and its standard:

• Actual figure of the degree of liquidity (at the end) - K1F;
• The initial coefficient is K1H;
• The indicator by the norm - К1норм = 2;
• Time to restore solvency (per month) - 6;
• The reporting period (calculated per month) - T.

A more accurate result can be obtained for 4 or more periods. In the opinion of economists, the coefficient of restoration of solvency is not an exceptional indicator, which should be adhered to.

Recognition of the structure of the balance is unsatisfactory

In the process of analysis, for an enterprise to be considered insolvent, any of the following conditions must be fulfilled:

• The liquidity indicator by the end of the reporting period is less than 2.
• The degree of security of its funds to the reporting date is less than 0.1.

Let us consider how the solvency recovery coefficient can be.

Example

During the last year, the liquidity indicator of the company at the beginning of the period was 0.97, and by the end - 1.18. Using the above formula, you can get: KB = 1,18 + 6/12 (1,18 - 0,97) = 0,3528.

If the calculation produces an indicator of more than 1, then we can say that the company has the opportunity to achieve an optimal financial condition for the next six months. If the coefficient of solvency recovery is less than one, then, accordingly, in the next six months, the company will not be able to achieve the necessary economic stability.

Forecasting

The ratio of recovery / loss of solvency is considered one of the key in the management analysis of the company. These indicators allow you to plan financial and economic activities for a certain period. Coefficient of restoration of solvency gives the chance to distribute operations and means for the nearest half a year for firm exit from crisis. However, this situation can be avoided. To do this, calculate the probability of deterioration of the current liquidity of the firm for three months following the balance sheet date: Kup = [K1f + 3 / T (K1f - K1n)] / K1norm.

For the benchmark with which the recovery / loss of solvency ratio is compared, a unit is taken. If the indicator is more than 1 when calculating the probability of deteriorating the financial situation, then this indicates that the company has all chances not to lose its liquidity. Accordingly, with a value less than 1, the company in the next three months may become insolvent.

Identification of false bankruptcy

To date, there is a somewhat different evaluation system. In the analysis, not the failure itself is established, but signs of fictitious bankruptcy are revealed. They represent the company's real ability to repay obligations to creditors fully on the date of filing an application for recognition as insolvent. Identification of these signs is carried out by establishing the ability to pay debts by assets through the ratio of their value to the size of short-term liabilities. The calculations exclude consumption funds, future incomes and reserves of payments and expenses. After making the necessary calculations, you can draw the appropriate conclusions:

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

Check of financial and economic work of firm

This procedure involves 2 stages:

• The calculation of the indicators that affected the changes in the company's ability to pay off the obligations that took place during the audit period is being carried out.
• An analysis is made of the terms of the transactions that led to the adjustment of the values.

Indicators that reflect the level of debt owed to creditors are:

• Security of liabilities with working capital.
• The volume of net assets.
• Secured debt with all assets.

The study of the financial and economic activity of the firm involves a study of the dynamics of these indicators during the verification period. If the procedure reveals a significant deterioration in the level of security of the debt at the first stage of the procedure, the experts proceed to an analysis of the conditions in which the transactions were concluded for the specified time. Consideration is made of those contracts that could affect the change in indicators.