2.2. The analysis of solvency and liquidity of spetsstroysvyaz Ltd balance

Financial condition of the organization can be assessed in short and long term. In the first case assessment criteria are the liquidity and solvency of enterprise, i.e. ability to timely and fully perform payments of short-term obligations. Examples of these operations are payments to employees for wages, to suppliers for the received material assets and services rendered, with bank for loan, etc.

There are different methods of analysis of financial condition. In our country a method based on calculation of a system of ratios and its use in a space-time analysis is broadly used. Ratios can be calculated directly according to the financial statements. Analysis of financial ratios implies comparison of their values ​​with the baselines, as well as studying of their dynamics during the reporting period and for several years³. Financial ratios used to assess the financial sustainability of the enterprise are largely based on indicators of financial profitability of the organization, management efficiency and business activity. ⁴

Table 2.2.1. Financial ratios used to assess the financial sustainability of the enterprise

Ratio	Calculation method	Recommended value	2005	2006	2007	2008	2009
Equity Capital/Total Assets ratio	U1=Equity/Total Assets	Min 0,4	0,28	0,35	0,29	0,13	0,19
Total Debt ratio/Equity Capital	U2=(LTL+STL)/Capital	U2<1,5	2,55	1,82	2,45	6,74	4,21
Availability of internal funds ratio	U3=(Capital-NCA)/CA	U3>0,1	-0,1	0,15	0,15	-0,02	0,01
Margin of financial safety	U4=(Capital+LTL)/Balance	U4>0,6	0,51	0,45	0,67	0,27	0,47

Equity Capital/Total Assets ratio shows the share of equity in the total amount of all assets of the company. Minimum threshold should be at the level of 0.4. This restriction shows that all the obligations of the organization may be covered with their own funds. In considered business, this ratio in 2006 was approaching the threshold, but in 2008 (because of the crisis) fell to its lowest value (0.13). Analysis of this factor shows that the activities of the enterprise are largely dependent on borrowing.

Figure 2.2.1. Dynamics of main financial coefficients for 2005-2009 and their recommended values

Total Debt/Equity Capital ratio shows how much debt a company has attracted to 1 ruble invested in the assets of its own funds. The maximum recommended value should not exceed the value of 1.5. Exceeding the specified limits means the company’s reliance on external sources of funds, loss of financial stability (autonomy). In this enterprise, this factor in the last considered reporting period exceeded the recommended value in 2.8 times.

Availability of internal funds ratio illustrates the existence of the company's own working capital needed for its financial stability. The higher the value, the better the financial condition of the company is, so the greater its capacity is to conduct an independent monetary policy. In 2009, this ratio was 10 times less than the allowable threshold.

Margin of financial safety shows how much of an asset is financed by sustainable sources. Recommended value is not less than 0.6. Since the company was during the reviewed period in the long-term lending, rate of financial stability was within the realm of valid values.

Liquidity assessment

Under the liquidity of an asset the ability to transform into cash is to be understood. The degree of liquidity depends on duration of the time period during which this transformation can be carried out. The shorter the period, the higher is the liquidity of the asset.

The liquidity of the commercial organization usually means that it has current assets in the amount theoretically sufficient to repay short-term debt even though the violation of maturity under the contract. Liquidity is quantitatively characterized by special relative indicators - liquidity ratios.

Solvency means that there is enough cash and cash equivalents in a commercial organization to accounts payable, requiring the immediate redemption. Thus, the main features of solvency are:

1. Availability of sufficient funds on the account;

2. Lack of overdue debts.

Liquidity and solvency are not identical to each other. Liquidity ratios can characterize the financial situation as satisfactory, but in essence this assessment may be misleading if the current assets have a significant share in the illiquid assets and overdue receivables.

Balance sheet liquidity is defined as the degree of coverage of the organization liabilities by its assets, the term of transformation to money of which matches obligations maturity.

Depending on the degree of liquidity, i.e. rate of conversion into cash, assets are divided into the several groups represented in Table 2.2.2.

Table 2.2.2. Assets structure

Assets group	2005	2006	2007	2008	2009
Group A1. Most liquid assets with a minimum term of monetization. These include: cash on hand and funds to the account, which can be used to meet current payments instantly. This group also includes the short-term investments.	6 224	7 617	26 061	12 399	1 165
Group A2. Quickly sold assets for circulation in cash takes some time. This group includes accounts receivable, payments are expected within 12 months after reporting date	17 045	52 180	56 393	82 065	72 560
Group A3. Slowly sold the assets. The least liquid assets - it's inventories, receivables, payments to be received in more than 12 months after the reporting date, the value added tax on acquired assets, and other current assets	13 296	9 017	18 096	13 847	14 069
Group A4. Illiquid assets. Assets that are intended for use in business for a long time. This group includes articles of Section I of the asset balance of "Non-current assets"	19 296	22 072	19 118	19 166	19 379

In turn, the liabilities are grouped by the term of their payment as shown on Table 2.2.3:

Table 2.2.3. Liabilities structure

Liability group	2005	2006	2007	2008	2009
Group L1. Most urgent liabilities	27 329	50 111	39 014	86 630	52 341
Group L2. Current liabilities	0	0	0	6 000	4 676
Group L3. Long-term liabilities	12 803	8 513	45 957	18 376	29 570
Group L4. Permanent liabilities or stable	15 729	32 262	34 697	16 471	20 586

To repay current obligations various kinds of assets with different turnover, i.e. the time required to turn them into cash, can be used. So depending on what types of current assets are taken into account the liquidity is evaluated using different ratios. The general idea of such an assessment is to compare current liabilities and assets used for the repayment. Current assets (liabilities) include those with maturity up to one year.

Table 2.2.4. Financial liquidity ratios

Ratio	Calculation method	Recommended value	2005	2006	2007	2008	2009
Current ratio	L1=(А1+0,5*А2+0,3*А3)/(L1+0,5*L2+0,3*L3)	≥1	0,55	0,57	0,92	0,45	0,45
Cash ratio	L2 = А1/(L1+L2)	>0,2-0,7	0,23	0,15	0,67	0,13	0,02
Quick ratio	L3 = (А1+А2)/(L1+L2)	Acceptable - 0,7-0,8, desirable ≥ 1,5	0,85	1,19	2,11	1,02	1,29
Acid test ratio	L4 = (А1+А2+А3)/(L1+L2)	Not less than 2,0	1,34	1,37	2,58	1,17	1,54
Current assets to equity ratio	L5 = А3/((А1+А2+А3)-(L1+L2))	The decrease in dynamics - a positive fact	1,44	0,48	0,29	0,88	0,46
Own funds ratio	L6 = (L4-А4)/(А1+А2+А3)	Not less than 0,1	-0,1	0,15	0,15	-0,02	0,01

On the basis of data (see appendix 2) analysis it can be concluded that considered enterprise is not able to make payments for all types of obligations - both immediate and in remote (Current ratio <1).

Current Ratio characterizes the company's solvency in the light of forthcoming earnings from debtors. It shows how much of the current liability organization can cover in short term provided the full repayment of debts. The growth rate in the dynamics is regarded as a positive feature of financial-economic activity. However, too much of its value is not desirable, because it may indicate an inefficient use of resources, expressed in slowing the turnover of funds invested in inventory, undue increase in accounts receivable, etc.

Using its own funds the company can repay in short term through cash only 2% of the debt (Cash ratio = 0.02). However short-term obligations can be fully repaid from the proceeds of the calculations (Quick> 1). The acid test ratio in 2009 is equal to 1.54. This means that the company can pay current liabilities, mobilizing all the current assets. Analysis the own funds ratio shows that since 2008 the enterprise has virtually no working capital for its financial stability.

For normalization of work of the enterprise and exit of the crisis situation the company needs to undertake a number of institutional arrangements. The main factors of liquidity and solvency of the organization are the state and efficiency of using circulating assets. One of the things that should be paid special attention of the company's management is management of current assets, reduction of losses in the production and financial cycle of current assets.