Enterprise Finance: Stability Analysis

If an enterprise does not have sufficient solvency, it is dangerous even if its profitability is higher. The ability of enterprises to deal with emergencies is very weak, and the operation of enterprises is a potential crisis. Only when an enterprise passes the test of stability can it have the conditions and foundation to develop steadily. Stability analysis includes short-term solvency analysis and long-term solvency analysis.

　　 1、 Short-term Liquidity analysis

The short-term solvency of enterprises, also known as short-term turnover capacity, refers to the ability of enterprises to current assets Ability to pay current liabilities. The indicators commonly used to measure short-term solvency are:

　　(1) Current ratio. Current ratio, also known as working capital ratio, is the most commonly used ratio to measure the short-term solvency of enterprises. It is obtained by dividing current assets by current liabilities. Current assets of enterprises usually include cash, marketable securities, accounts receivable and inventory, while current liabilities

Quick ratio is also called acid test ratio. The calculation formula is as follows:

Quick ratio=quick assets ÷ current liabilities=(current assets - inventory - prepaid expenses) ÷ current liabilities

It is generally believed that it is appropriate for the quick ratio to be equal to 100%, neither too high nor too low.

(3) Working capital. Working capital capita)， It refers to the difference between current assets and current liabilities. Because the liquidation of current liabilities consumes current assets, it should be subtracted from current assets so that the balance can represent the turnover capacity of the enterprise, so working capital is regarded as an important indicator to measure the short-term solvency of the enterprise.

　 　2、 Long-term solvency analysis

Long term solvency analysis is also called capital structure or financial structure analysis. This is because there are many uncontrollable factors in the long-term solvency of enterprises in the future, which can only be evaluated by indirect means, namely, by analyzing the capital structure of the company. The so-called capital structure refers to the proportion of the enterprise's own funds and borrowed funds. Specific indicators are as follows:

　　(1) Ratio of shareholders' equity to liabilities. The capital of the enterprise mainly comes from shareholders and creditors, namely shareholders' equity and liabilities. The ratio of shareholders' equity to liabilities shows the relative proportion of the two funds. The higher the ratio, the less debt the enterprise has and the more secure the interests of creditor's rights; On the contrary, it shows that the enterprise has too much debt and its financial structure is not sound enough. Once encountering a recession, the enterprise will have difficulty in repaying debts, and the interests of creditors will be less protected. The ratio formula is as follows:

Ratio of shareholders' equity to liabilities=shareholders' equity ÷ liabilities

　　(2) Debt ratio and equity ratio. The total assets of the company is equal to the total liabilities plus the total shareholders' equity. Total liabilities divided by total assets quotient is the debt ratio; The quotient of shareholders' equity divided by total assets is the equity ratio, also known as the self owned capital ratio. The sum of these two ratios is equal to 100%. They are used to measure the funding ratio of creditors and shareholders in total assets respectively. The formula is:

Debt ratio=total liabilities ÷ total assets

Equity ratio=shareholders' equity ÷ total assets

When the equity ratio is too low (that is, the debt ratio is too high), the protection received by creditors will be reduced; However, if the equity ratio is too high, it will also reduce the role of financial leverage, which is more adverse to shareholders. Therefore, the measurement of these two ratios should not be extreme. In addition, attention should also be paid to the characteristics of the industry. For example, the equity ratio of the financial industry is generally much lower than that of other industries.

　　(3) Ratio of fixed assets to shareholders' equity. This ratio can be used not only to test the solvency of enterprises, but also to show whether the investment in fixed assets of enterprises is appropriate and whether enterprises have financial risks exposed by long-term use of short-term funds. The calculation formula of this ratio is:

Ratio of fixed assets to shareholders' equity=fixed assets ÷ total shareholders' equity

If this ratio is less than 1, it means that all the funds needed by the enterprise to purchase fixed assets come from shareholders, and the company is relatively stable. If this ratio is greater than 1, it means that part of the funds needed by the enterprise to purchase fixed assets comes from creditors, and the company's operation is less robust.

　　(4) Ratio of net tangible assets to long-term liabilities. Generally, when an enterprise obtains long-term loans or issues bonds, it must use its tangible assets as collateral. This ratio can measure the degree of protection of the liquidation value of assets against long-term liabilities. Net tangible assets refer to the total assets minus intangible assets without physical existence such as goodwill, trademark rights, patent rights and concessions.

Ratio of net tangible assets to long-term liabilities=net tangible assets ÷ long-term liabilities

When this ratio is greater than 1, it means that creditors of long-term liabilities have better protection.

　　(5) Interest cover ratio. Many analysts believe that unless an enterprise ends its business, it is unlikely to repay its liabilities entirely by disposing of assets. Surplus is often used to pay the principal and interest of long-term liabilities. Therefore, it is also necessary to analyze the relationship between earnings and interest expenses.

Interest protection multiple is also called surplus interest multiple or earned interest multiple. It is obtained by dividing the company's profit before paying interest and income tax by the total interest.

Interest coverage ratio=profit before interest payment and income tax payment ÷ interest expense of the current period