Financial Balance and Solvency Analysis for Businesses
Financial Analysis of Balance
Financial Balance
Financial balance refers to finding a suitable proportionality between the masses reflecting financial sources (net and liabilities), internally and in comparison to the investments made by the company.
You should consider:
- A relevant proportionality between personal and external resources, which enables the satisfaction of interest and principal of the debts contracted as they produce their maturities.
- Adequate resources other than proportionality between long and short term, which provides an appropriate scope to overcome any difficulties at the maturity of debts and abnormal situations.
Analysis of Liquidity
The analysis of the liquidity of an enterprise aims to give a vision of the company’s financial capacity to implement, in a timely manner, payments of the commitments undertaken for transactions outside financing, with short maturity.
It is designed to detect, through the books, the degree of liquidity of assets and therefore the level of convertibility into means of payment for refunds to tackle the debt principal and interest inherent to it.
Analysis of the Solvency and Debt of the Company
The analysis of the long-term solvency is aimed at giving a vision of the membership financial structure and its correlation with the economic structure of the company, from a long-term perspective.
The analysis of indebtedness addresses the various relationships between assets and liabilities, in order to obtain different values to allow for measuring financial risk in relation to the amount of debt, both short and long-term, ordered by the company.
Financial Ratios
-
Financial Autonomy (AF) = Capital / Total Debt
This ratio provides information on the relative composition of the sources of financing of the company. It also reports on the ability of the company to be financially independent, i.e., whether it can freely choose its sources of funding.
-
Coefficient of Guarantee (CG) = Real Asset / Total Debts
Covers the guarantee that creditors have to enforce their rights to payment, assuming the liquidation of assets of the company.
-
Short-Term Solvency = Current Assets / Current Liabilities
It reports on the ability of the company to meet its debts with a maturity of less than one year, with the assets owned by the same conversion period in which liquidity is also lower than a year.
-
Acid-Test Ratio = (Cash + Treasury + Marketable Securities + Accounts Receivable) / Current Liabilities
This ratio is a very short-term liquidity ratio, which assesses whether the company can meet its short-term debt assuming the impossibility of conversion to liquidity of stocks, so it may only be used for this purpose cash, credit assets, and listed securities, i.e., those assets convertible into cash at short notice.
- Debt Ratio = Debt / Equity
Aging Rate of Fixed Assets (TE)
This ratio reports the status of depreciation of fixed assets, which is to show the level of aging assets and thus the possible degree of competitiveness of the company in the market, enabling a vision of the prospects for profitability.
Fixed Rate with Coverage of Permanent Resources (TC)
The analysis of this ratio shows whether the permanent financial structure is sufficient to fund net fixed assets, or, if on the contrary, it is financed in part due to the short term. The latter case may indicate the existence of a financial imbalance.