Solvency of the enterprise: characteristics and solvency ratio

The solvency of an enterprise is the ability of a particular entity to repay loans on time and fully repay loans. It is a key feature of the normal and sustainable economic situation of any organization.

The company's solvency will be composed of the following factors.

First, the enterprise has assets (that is, property and cash) that are sufficient to pay off all the obligations that the organization has.

Secondly, the degree of liquidity of those assets that the company has, should be sufficient to realize them if necessary, transferring in money and in an amount that is sufficient to repay the obligations taken.

The company's management is recommended to use methods of analyzing the financial condition, one of which is the solvency ratio. Let us dwell on them in more detail.

The first solvency ratio should be aimed at studying the company's own capital. If the company does not have it, then the organization will not be able to pay off the obligations. Such a company is solvent only for a short term, settling for existing debts. But sooner or later, it is likely that bankruptcy will be expected.

The second, more rigid solvency ratio of the company is an indicator of the availability of own funds, the standard of which is approved by the Federal Office for Bankruptcy. It is calculated by a special formula. The value of non-current assets is deducted from the equity indicator . The resulting number should be divided by the number of current assets. This value (favorable) must be at least 0.1.

But the company's positive net assets do not always indicate that it has good solvency. The fact is that we need an analysis of the second factor mentioned above, the liquidity of assets.

Situations can be unexpected. So, often there is a discrepancy between the available liquidity of all assets and the upcoming maturity of loan commitments. For example, a company, on the one hand, has a large share of non-current assets that are difficult to realize, because they are low liquid. But, on the other hand, it has a large share of short-term liabilities. In such a case, sooner or later there may come a time when the enterprise will not have the means to pay off current liabilities. In this case, you will need to use a special solvency ratio. This is a measure of liquidity (fast, current and, of course, absolute).

These coefficients will be calculated by a single principle. We take into account the ratio of the ratio of the current assets of different liquidity to the existing liabilities. But the ratio of solvency and current liquidity will be calculated taking into account available current assets, and quick liquidity - taking into account liquid current assets. The calculation of the absolute indicator is based on a system of highly liquid assets (cash and short-term financial assets).

The head of the company should keep in mind that in the event that the liquidity ratios will fit into the officially adopted standard, then the company will be considered reliable and prosperous. Otherwise, a compulsory calculation of the solvency recovery index is required.

As a result, there should be a coefficient of total solvency, which is able to show the enterprise's ability to cover all its liabilities (long-term and short-term) with available assets.