Analysis of Corporate Solvency and Financial Risk - World Credit Organization

3.9 Analysis of corporate solvency and financial risk

Commonly used solvency analysis ratios include asset-liability ratio, financial leverage ratio, interest coverage ratio, etc.

1. Asset-liability ratio

The asset-liability ratio is the comparison of the total liabilities of the enterprise with the total assets.

The asset-liability ratio reflects the long-term solvency of the enterprise and the potential of continuing to raise debt in the future. The lower the index, the higher the protection degree of assets for creditor's rights, and the more willing creditors are to provide loans to enterprises, which shows that enterprises have great potential for borrowing and are capable of overcoming capital turnover difficulties; on the contrary, if the index is too high and exceeds a certain range, enterprises If the long-term repayment ability is poor, the interests of creditors cannot be protected, and enterprises will encounter difficulties in raising debt.

Case: Wing Fat Company's 2004-2007 capital-liability ratio

It can be seen from the above table that the asset-liability ratio of this unit has increased significantly every year, and has reached 83.3%.

2. Financial leverage ratio

The financial leverage ratio indicates that an enterprise uses one yuan of its own funds to do business for a few yuan, and it shows the degree to which the enterprise "uses four or two thousand catties". The financial leverage ratio is not an absolute concept. Sometimes the financial leverage ratio is calculated by the ratio of the debt that needs to be repaid first to the total assets.

Just like other financial ratios, there is no ideal or highest financial leverage ratio, but the higher the financial leverage ratio, the higher the financial risk.

3. Interest coverage ratio

This ratio mainly reflects whether the profit of the enterprise can repay the interest cost, and is often used by banks to evaluate the loan risk.

Fourth, current ratio and quick ratio

Generally speaking, the higher these two ratios, the stronger the liquidity of corporate assets and the stronger the short-term solvency; vice versa. It is generally believed that the current ratio should be above 2:1, and the quick ratio should be above 1:1. The current ratio is 2:1, which means that the current assets are twice the current liabilities. Even if half of the current assets cannot be realized in the short term, all current liabilities can be guaranteed to be repaid; the quick ratio is 1:1, which means that cash, etc. can be realized immediately. Liquid assets equal to current liabilities, and all current liabilities can be paid at any time. Of course, the operating conditions of different industries are different, and the normal standards of current ratio and quick ratio will be different. It should be noted that the higher these two ratios, the better. The current ratio is too high, that is, there are too many current assets relative to current liabilities, which may be a backlog of inventory, or too much cash held, or both; the quick ratio is too high, that is, the ratio of quick assets to current liabilities Too much debt means too much cash. The backlog of inventory of the enterprise indicates that the enterprise is not well managed, and there may be problems with the inventory; too much cash holdings may indicate that the enterprise is not good at financial management, and may indicate that the efficiency of capital utilization is too low.

5. Invert current ratio

The inverse current ratio measures the proportion of a business' current assets that is funded by current liabilities. If the reverse current ratio is 60%, it means that 60% of the current assets of the enterprise are funded by current liabilities.

6. Number of days between no credit

The calculation method of daily operating expenses is:

Depreciation and amortization are deducted because they are not cash expenses.

The above content is excerpted from "ICE8000 Credit Investigation, Analysis, and Rating" (written by Fang Bangjian, free to use, but please indicate the source)